4 Organizations Issue Joint Public Comment on Centers for Medicare & Medicaid Services Proposed Rule

WASHINGTON, July 19 -- Joel McElvain, partner at King and Spalding LLP, has issued a public comment on behalf of 4 organizations on the Centers for Medicare and Medicaid Services' proposed rule entitled "Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System and Proposed Policy Changes and Fiscal Year 2021 Rates; Quality Reporting and Medicare and Medicaid Promoting Interoperability Programs Requirements for Eligible Hospitals and Critical Access Hospitals". The comment was written on July 10, 2020, and posted on July 15, 2020:

The organizations are the Baptist Health, Memorial Hermann Health System, OSF Healthcare System and the University of Kansas Hospital System.

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The patients and staff of Baptist Health, Memorial Hermann Health System, OSF Healthcare System, and the University of Kansas Hospital System ("the Hospitals") appreciate the opportunity to comment on the Centers for Medicare & Medicaid Services' ("CMS") fiscal year ("FY") 2021 Hospital Inpatient Prospective Payment System ("IPPS") Proposed Rule. 85 Fed. Reg. 32,460 (May 29, 2020) ("Proposed Rule"). Section IV.P of the Proposed Rule declares CMS's intent to adopt regulations that would require hospitals to report to CMS a calculation of the median payer-specific negotiated rate that the hospitals have negotiated with Medicare Advantage ("MA") plans by MS-DRG, and to perform and report a similar calculation with respect to all commercial plans. The Proposed Rule also announces the agency's intent to base the relative weighting of MS-DRGs, for the purpose of calculating IPPS payments, on the reporting of these median rates. Id. at 32,790-32,797. These proposed regulations are misguided in several respects. The proposed reporting requirements would impose a heavy administrative burden on hospitals, but would not produce data that would be reliable or useful for the agency. CMS, moreover, lacks the statutory authority to proceed to the second step of its proposal to base the weighting of MS-DRGs on the reporting of these median prices; the Medicare statute permits the agency only to adjust the IPPS weighting system, not to fundamentally transform it as the agency has proposed here. Even if CMS did have that authority, it should refrain from doing so, given that the reported median prices would not measure anything that would be of relevance to the statutory scheme for the calculation of IPPS payments. In this letter, the Hospitals address their comments first to the proposed reporting requirement, and then to CMS's proposed restructuring of the IPPS payment system./1

I. CMS Should Not Require Hospitals to Calculate and Report Median Payer-Specific Negotiated Rates.

CMS proposes to require hospitals to report, first, "the median payer-specific negotiated charge that the hospital has negotiated with all of its MA organization payers, by MS-DRG," and, second, "the median payer-specific negotiated charge the hospital has negotiated with all of its third-party payers, which would include MA organizations, by MS-DRG." 85 Fed. Reg. at 32,793. Hospitals would report these calculations on their cost report, and the completion of these calculations would be a condition for receiving Medicare payment. Id. By the agency's own admission, the validity of this requirement depends on the validity of the agency's November 2019 price transparency rule, 84 Fed. Reg. 65,524 (Nov. 27, 2019), given that the medians to be reported under the new rule would be based on calculations derived from pricing information that hospitals gather pursuant to the price transparency rule. 85 Fed. Reg. at 32,791-32,792.

As an initial matter, then, CMS should not proceed with this proposal because the validity of the price transparency rule is very much in doubt. An appeal is currently pending before the U.S. Court of Appeals for the D.C. Circuit, in which several hospital associations and individual hospitals are seeking to invalidate that rule. See Am. Hosp. Ass'n v. Azar, 2020 WL 3429774 (D.D.C. June 23, 2020), appeal pending, No. 20-5193 (D.C. Cir. docketed June 30, 2020). There are strong reasons to believe that the plaintiffs will prevail in this appeal. For that rule, CMS relied on statutory authority requiring hospitals to disclose "a list of the hospital's standard charges for items and services provided by the hospital," 42 U.S.C. Sec. 300gg-18(e), to require hospitals to disclose multiple lists and matrices of confidential pricing data based not on standard charges, but individually-tailored payment rates negotiated with individual payers. Given the fundamental mismatch between the statute and the price transparency rule, and given the First Amendment concerns the price transparency rule raises, there is strong reason to believe that the D.C. Circuit will invalidate that rule.

The current IPPS proposed rule could not stand in that eventuality. The central premise of the current proposal is that hospitals would already be required under the price transparency rule to calculate and report the pricing data that the new reporting obligation would be based upon. Indeed, multiple provisions in the proposed rule are structured so as to cross-reference the price transparency rule. See, e.g., 85 Fed. Reg. at 32,793-32,794 (defining "payers" and "items and services"). The current proposal would not meaningfully operate if the price transparency rule were to be set aside. CMS, then, should not proceed with this proposal, or at a minimum it should wait until the legality of the price transparency rule is settled by the courts.

Moreover, the proposed rule, if adopted, would impose a substantial administrative burden on hospitals, to no useful end. It is noteworthy that, in the November 2019 price transparency rule, CMS considered also requiring hospitals to report median pricing data at that time, but elected not to do so in recognition of the unnecessary burden that hospitals would face in complying with that additional obligation. See 84 Fed. Reg. at 65,555 ("In response to comments and in the interest of minimizing hospital burden, we are not finalizing the inclusion of the median negotiated charge as a type of standard charge."). The proposed rule fails entirely to discuss the agency's own finding, only last November, that the reporting of median prices would be unnecessarily burdensome to hospitals. It was obligated in the proposed rule, however, to recognize that it had departed from its prior finding and to provide a reasoned explanation for that change. See FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009) ("To be sure, the requirement that an agency provide reasoned explanation for its action would ordinarily demand that it display awareness that it is changing position. An agency may not, for example, depart from a prior policy sub silentio or simply disregard rules that are still on the books." (emphasis in original)). CMS's failure to acknowledge or to attempt to justify its change of position in its proposed rule has deprived commenters of the opportunity to respond to the agency's reasoning on that score.

In any event, the agency's current estimate of the size of the burden that it would now impose on hospitals is fundamentally inaccurate. CMS suggests that any one hospital would need to devote only fifteen hours per year to compliance with the proposed rule, divided between five hours for recordkeeping and ten hours for reporting. See 85 Fed. Reg. at 32,889. This is almost certainly wrong by several orders of magnitude. CMS is not proposing that hospitals engage in simply the ministerial task of recording data that is already in the hospitals' possession.

Instead, the agency would require hospitals to "cross-walk" data from their contracts with commercial payers, which may use payment methodologies that vary from the IPPS system's use of Medicare DRGs. See id. at 32,794. This cross-walking would require complex calculations that would require a substantial investment of hospitals' time and resources. Baptist Health, for example, estimates that more than 27,000 claims per year for its system of five hospitals, across a number of different payers, would need to be individually re-coded to align them with the MS-DRG categories. Baptist Health also estimates that it can take between 15 minutes to 5 hours to code an inpatient admission, depending on the length of stay. This would translate to a minimum of more than 6,000 hours per year of additional work to engage in this coding, even apart from the time required to calculate the required medians, at a cost of at least $210,000. At a time when hospitals are facing severe cash flow difficulties in light of the COVID-19 national emergency, it would be unjustifiable for CMS to impose this burden on hospitals.

At all events, this exercise would not result in any meaningful data for the agency. The quality of the data that CMS would derive from this new reporting obligation would depend on the quality of the underlying data on payer-specific negotiated rates that hospitals are required to develop under the price transparency rule. But there are multiple flaws in the notion that the price transparency rule produces data that accurately measures hospitals' negotiated prices. That rule excludes pricing data (apart from the reporting of base rates, which may vary widely from final payment rates) from contracts that follow alternative payment models, even though alternative payment models are a growing feature of the health care marketplace. As of 2017, approximately 34% of all health care payments were made on the basis of such models, see Health Care Payment Learning & Action Network.

Measuring Progress: Adoption of Alternative Payment Models in Commercial, Medicaid, Medicare Advantage, and Medicare Fee-for-Service Programs, at 3 (Oct. 22, 2018), hcp-lan.org/workproducts/apm-discussion-2018.pdf, a trend that will continue to grow in the coming years, id. at 12. No meaningful data would be reported from this large, and growing, portion of the market. The price transparency rule also creates arbitrary differences between hospitals, requiring a hospital to display payer-specific negotiated rates for services performed by practitioners who are employed by the hospital and who are subject to the contractual agreement with a particular insurer, but not for services performed by practitioners with independent billing arrangements who are not bound by the hospital's contract with that insurer. See 84 Fed. Reg. at 65,534-65,535. In short, the data set of payer-specific negotiated rates that hospitals will develop under the price transparency rule would not accurately describe the actual prices that hospitals are paid by commercial insurers, and any "medians" derived from that set of data would not provide useful data.

CMS should refrain from imposing a reporting burden that is of doubtful legality, that would impose severe administrative burdens on hospitals, and that would not result in meaningful information for the agency.

II. CMS Should Not Transform the Existing IPPS System into a System Based on the Reporting of Privately Negotiated Rates.

A. CMS Lacks the Statutory Authority to Do So.

CMS cannot, consistent with the text of the IPPS payment statute, substitute the current system for the relative weighting of MS-DRGs with an entirely new system based on reported prices. Since FY2007, CMS has based the relative weighting of MS-DRGs on a methodology that compares a hospital's department-level charges to its department-level cost-to-charge ratio. See 71 Fed. Reg. 47,870, 47,881 (Aug. 18, 2006). As CMS recognizes in its Proposed Rule, the current methodology calculates "weights [that] reflect the relative hospital resources used with respect to discharges classified within that MS-DRG compared to discharges classified within other MS-DRGs." 85 Fed. Reg. at 32,792. The agency now proposes to substitute an entirely new system of calculating relative weights, based on the calculations of median prices that the agency would now require hospitals to perform. The agency does not base its proposal on any finding that this new system would provide a better measure of the hospital resources that are used with respect to particular MS-DRGs. Instead, CMS suggests that its proposal is based on its intent to "inject market pricing into Medicare FFS reimbursement." Id.

The agency purports to rely on subparagraph (d)(4)(B) of the IPPS statute, 42 U.S.C. Sec. 1395ww(d)(4)(B), as the source of its statutory authority to fundamentally rework the payment system in this manner. See 85 Fed. Reg. at 32,792. The referenced provision states as follows:

For each such diagnosis-related group the Secretary shall assign an appropriate weighting factor which reflects the relative hospital resources used with respect to discharges classified within that group compared to discharges classified within other groups.

42 U.S.C. Sec. 1395ww(d)(4)(B).

That subparagraph is inapposite, however, because the Secretary has already assigned weighting factors to the various MS-DRGs that are paid for under IPPS.

Once those assignments have been performed, the agency's authority to alter its formula rests on the following provision, subparagraph (d)(4)(C), which, as discussed below, governs "adjustments" to relative weights. A contrary reading of the statute-- in which the agency could both initially establish weighting factors under subparagraph (d)(4)(B) and alter those weighting factors later under the same provision--would entirely subsume subparagraph (d)(4)(C). This result would violate the principle that no part of a statute should be read to be superfluous. See, e.g., Maine Cmty. Health Options v. United States, 140 S. Ct. 1308, 1323 (2020). (In any event, even if subparagraph (d)(4)(B) were the relevant provision here, it would not be "appropriate" to base relative weights on negotiated prices, nor would that information "reflect ... relative resources" in any meaningful way, for the reasons explained elsewhere in this letter.)

The provision that actually does govern the agency's authority to adjust relative weights, 42 U.S.C. Sec. 1395ww(d)(4)(C), goes entirely uncited in the Proposed Rule. It is not difficult to understand why: it does not grant the agency the power to fundamentally transform the system of relative weights in IPPS in the manner that the agency seeks to do here. That provision states:

The Secretary shall adjust the classifications and weighting factors established under subparagraphs (A) and (B), for discharges in fiscal year 1988 and at least annually thereafter, to reflect changes in treatment patterns, technology (including a new medical service or technology under paragraph (5)(K)), and other factors which may change the relative use of hospital resources.

42 U.S.C. Sec. 1395ww(d)(4)(C)(i) (emphasis added)./2

The power to "adjust" weighting factors is a modest one; it does not authorize a "total elimination or severe restructuring of the statutory scheme." Amgen, Inc. v. Smith, 357 F.3d 103, 117 (D.C. Cir. 2004) (noting limits on CMS's authority to adjust the operation of the OPPS system). See also MCI Telecomm'ns Corp. v. Am. Tel. & Tel. Co., 512 U.S. 218, 225 (1994) (authority to "modify" certain statutory requirements does not include power to make "basic and fundamental changes in the scheme").

That this "adjustment" authority is a limited one is confirmed by the text of subparagraph (d)(4)(C), which does not grant the agency the power to adjust relative weights whenever the agency decides it would be wise to do so, but instead grants that power only with respect to those adjustments that "reflect changes in treatment patterns, technology ..., and other factors which may change the relative use of hospital resources." 42 U.S.C. Sec. 1395ww(d)(4)(C)(i). The agency has not cited any changes in treatment patterns, technology, or any other similar factors that have changed the relative use of hospital resources since the publication of last year's IPPS rule, or over any other period of time. (The Hospitals, of course, would have the right to notice of, and the opportunity to comment on, any attempt by the agency to rely on such factors in the future. See 42 U.S.C. Sec. 1395hh(b).) Nor has the agency attempted to defend its rule as an attempt to capture changes in the relative use of hospital resources; it instead has simply asserted, without further detail, that basing relative weights on reported prices would make the Medicare system more "market-based." See 85 Fed. Reg. at 32,792. There is a fundamental mismatch, then, between the limited authority that the Medicare statute grants to the agency to adjust relative weights of MS-DRGs under the IPPS system and the agency's wide-ranging claim of authority to fundamentally reshape the IPPS system reflected in the Proposed Rule.

What is more, CMS's proposal would create internal inconsistencies in the IPPS statute, when that statute is read in full. In particular, the proposed rule would render the IPPS system for the calculation of outlier payments incoherent. Under 42 U.S.C. Sec. 1395ww(d)(5)(A)(ii), outlier payments are based on a comparison of "charges, adjusted to cost" to the DRG prospective payment rate. This calculation makes sense under the agency's current methodology, in which the baseline of DRG prospective payment rates is itself based on an analysis of charges adjusted to cost. But the calculation would become nonsensical under the Proposed Rule, as outlier payments would depend on an apples-to-oranges comparison of two entirely different metrics.

The Proposed Rule, then, cannot be reconciled with the overall statutory scheme of the IPPS statute. See King v. Burwell, 135 S. Ct. 2480, 2492 (2015) (it is a "fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme").

B. The Proposed Rule Would Not Meaningfully Measure Hospitals' Relative Use of Resources Associated with Particular MS-DRGs

As noted above, the purpose of the relative weighting calculation is to allocate a fixed pool of IPPS payments in an equitable manner that reflects the actual amount of resources that hospitals use with respect to particular DRGs; hospitals should be paid more, as a matter of simple fairness, for the procedures that are more costly for them. This is why the current IPPS methodology calculates charges adjusted to cost; this methodology "reflect[s] the relative hospital resources used with respect to discharges classified within that MS-DRG compared to discharges classified within other MS-DRGs." 85 Fed. Reg. at 32,792. CMS does not suggest in its Proposed Rule that its new methodology would better capture the comparison of relative hospital resources used for discharges within the various MS-DRGs. And there are powerful reasons to believe that the Proposed Rule's methodology would not do so.

First, if the agency were to proceed with a proposal to base the calculation of relative weights on the median prices that hospitals arrive at with Medicare Advantage plans, the new rule would not produce useful data. The rule would instead only result in a circularity, given that Medicare Advantage plans themselves base their payment rates on FFS Medicare. Medicare Advantage plans serve about one third of Medicare beneficiaries. There is a wide array of research literature that demonstrates that these plans set the weighting of their payment rates based on Medicare FFS weights. See Jared Maeda and Lyle Nelson, How do the Hospital Prices Paid by Medicare Advantage Plans and Commercial Plans Compare with Medicare Fee-For-Service Prices?, 55 J. HEALTH CARE ORG., PROVISION, & FINANCING 1, 1-8 (2018); Robert A. Berenson et al., Why Medicare Advantage Plans Pay Hospitals Traditional Medicare Prices, 34 HEALTH AFFAIRS 1444, 1444-1451 (Aug. 2015). It is commonly the case that Medicare Advantage rates are set at 100 percent of FFS rates, which means that Medicare Advantage plans are explicitly using Medicare FFS relative weights to set their prices. As a result, it would be entirely circular to use Medicare Advantage rates to set FFS MS-DRG weights. The result would be simply to impose an administrative burden on hospitals without adding any useful information to the rate-setting process. (To the extent that this proposal would result in any differences in relative weights for MS-DRGs, these differences would only reflect the happenstance of those cases in which particular MA plans deviate from FFS payment methodologies; there is no reason to believe, however, that this would result in any measurement that meaningfully measures how hospitals use their resources across different MS-DRGs.)

Second, if the agency were instead to base the calculation of relative weights on the median prices that hospitals arrive at with all commercial plans, this change in methodology would result in arbitrary changes to the relative weights for MSDRGs that would not reflect hospitals' actual costs in treating Medicare patients.

Negotiated commercial rates can vary widely, even within a single market for reasons that turn on insurers' relative market power rather than a comparison of the hospital's relative use of its resources. See Zack Cooper, et al., The Price Ain't Right?

Hospital Prices and Health Spending on the Privately Insured, 134 QUARTERLY J. OF ECON. 51, 51-107 (2019). Rates paid by commercial insurers vary more widely for certain services than for others. See Chapin White and Christopher Whaley, Prices Paid to Hospitals by Private Health Plans are High Relative to Medicare and Vary Widely, 24 (Rand Corp. 2019), rand.org/pubs/research_reports/RR3033.html. The relevant question here, for purposes of weighting MS-DRGs, is whether relative rates paid by commercial insurers accurately reflect providers' relative costs; there is simply no reason to believe that they do. Given the fact that payment rates vary widely in the commercial sector, and that they vary widely from service to service, commercial payment rates would not be a useful metric for setting the relative weights of MS-DRGs in the IPPS system.

At an absolute minimum, CMS should not proceed with its proposal to transform the IPPS system for the setting of relative weights among MS-DRGs, but it should wait until more evidence is developed in order to properly evaluate the issue.

The agency's price transparency rule, if it survives a legal challenge, will go into effect next year. CMS cannot predict with certainty that it will gain useful data from the pricing reporting required from hospitals under that rule. As discussed above, there are strong reasons to believe that any data derived from hospitals' price reporting will suffer from serious distortions. CMS should not finalize a proposal to change its IPPS relative weighting methodology until it has the opportunity to evaluate the quality of the data that it would base its proposal upon.

III. Conclusion

The Proposed Rule, if finalized, would force hospitals to incur substantial administrative burdens, to no useful end. The Proposed Rule, if finalized, would far exceed the agency's authority under the Medicare statute, which is limited to adjustments to the relative weighting of DRGs, rather than a fundamental restructuring of the IPPS system. For these reasons, the Hospitals urge the agency not to finalize its proposal with regard to the reporting of median payer-specific negotiated rates.

Sincerely,

Joel McElvain

On Behalf of Baptist Health,

Memorial Hermann Health System,

OSF Healthcare System, and

The University of Kansas Hospital System

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Footnotes:

1/ The Hospitals reserve the right to submit separate comments on other aspects of the Proposed Rule.

2/ Adjustments under this provision must be budget-neutral, see 42 U.S.C. Sec. 1395ww(d)(4)(C)(iii), as CMS apparently recognizes by providing for a budgetneutrality adjustment in the Proposed Rule, see 85 Fed. Reg. at 32,797. This, again, demonstrates that subparagraph (d)(4)(C) must be read to have an independent meaning from subparagraph (d)(4)(B), and that the agency's power to adjust relative weights after those weights are first established arises only under subparagraph (d)(4)(D). The budget-neutrality proviso would be meaningless if the agency could ignore it simply by invoking its authority to set relative weights in the first instance. See Am. Hosp. Ass'n v. Azar, 410 F. Supp. 3d 142, 156 (D.D.C. 2019) (rejecting agency claim of authority under the OPPS statute that would render budget-neutrality requirement superfluous), appeal pending, No. 19-5352 (D.C. Cir. docketed Dec. 13, 2019).

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The proposed rule can be viewed at: https://www.regulations.gov/document?D=CMS-2020-0052-0002

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