ACLA Sues HHS, Claims Flaws In How CMS Set 2018 Rates


CEO SUMMARY: When the American Clinical Laboratory Association filed its lawsuit Dec. 11 against the Secretary of Health and Human Services, one of its main claims is that HHS collected payment data on the clinical laboratory testing business in a manner that was deeply flawed. HHS then used that flawed data to set payment rates under the 2018 Clinical Laboratory Fee Schedule. Those rates went into effect Jan. 1 and could force some clinical laboratories to close, the lawsuit says. This would reduce the access many Medicare beneficiaries have to quality lab testing.

EVERY CLINICAL LABORATORY in the United States has a substantial interest in the ongoing federal lawsuit that was filed in December by the American Clinical Laboratory Association (ACLA) against the U.S. Department of Health and Human Services.

At stake are billions of dollars in cuts to the 2018 Medicare Part B Clinical Laboratory Fee Schedule (CLFS). These cuts were implemented by the federal Centers for Medicare and Medicaid Services under the Protecting Access to Medicare Act of 2014 (PAMA).

Analysis of Court Documents

Given the national significance of this federal court case to the clinical laboratory industry, THE DARK REPORT is presenting this analysis of the court documents that were filed by ACLA.

To date, supporting amicus briefs have been submitted by AdvaMed, the American Association of Bioanalysts, the College of American Pathologists and the National Association for the Support of Long Term Care.

In clear and compelling language, the American Clinical Laboratory Association has laid out in a 52-page lawsuit why a federal district court should overturn the payment-data-collection system the U.S. Department of Health and Human Services (HHS) established in 2016.

Originally filed Dec. 11, the lawsuit asks the U.S. District Court for the District of Columbia to order Secretary of Health and Human Services Alex M. Azar to withdraw or suspend the Medicare Clinical Diagnostic Laboratory Tests Payment System Final Rule published in the Federal Register June 23, 2016. By instituting the final rule, HHS violated the Administrative Procedure Act and the Social Security Act, ACLA argued.

HHS wrote the final rule in an effort to comply with the Proctecting Access to Medicare Act (PAMA) of 2014. In PAMA Section 216, Congress instructed HHS to develop a new market-based payment system for clinical labs, but, the lawsuit explains, HHS did not comply with Congress’ intent when it collected the private insurer payment data used to develop the new payment system, which became effective Jan. 1 under the 2018 Clinical Laboratory Fee Schedule.

After Congress passed PAMA in 2014, the Congressional Budget Office estimated that Medicare payments made under the CLFS would decline by about $100 million in the first year of the implementation of PAMA Section 216. “But that estimate assumed that the Secretary would comply with the statute and collect information from the market as a whole,” the ACLA lawsuit says. “By excluding virtually all hospital laboratories from the data-reporting requirements, the Secretary’s final rule has resulted in an industry-crippling reduction in Medicare payments by more than $600 million.”

Required Data Collection

Under the final rule, HHS collected data on the prices commercial health insurers pay for clinical laboratory test services nationwide. But, by excluding hospitals labs, it did not collect payment data on the second largest and the highest-paid segment of the clinical lab industry, the ACLA argues.

HHS then used that flawed data to set payment rates under the CLFS that could force some clinical diagnostic laboratories to close and others to reduce lab testing services, especially in remote and rural areas. Labs in these areas are the only source of such testing for elderly and disabled Medicare beneficiaries, ACLA wrote in its lawsuit.

The effects of not collecting market data as Congress instructed are particularly acute for small community and rural hospital laboratories, the lawsuit says. Those laboratories will be forced to significantly scale back their operations or eliminate the outreach laboratory services they provide because they will no longer be able to afford to provide those services to non-hospital patients, it adds.

Also, laboratories that serve non-ambulatory patients in skilled nursing facilities (SNFs) and nursing homes will be forced to cut back their services significantly, and many of these laboratories will be forced out of business, it says.

Nursing Homes, SNFs

Providing lab testing services to nursing homes and SNFs is a costly endeavor that larger laboratories will not be willing to provide, the lawsuit adds. “As laboratories close or are required to scale back services, Medicare beneficiaries and other patients will suffer by being deprived of the essential laboratory services they need,” it says.

The ACLA lawsuit also described one of the chief reasons the data were flawed. This was because, under HHS’ payment-data-collection system, only 21 of the nation’s 7,000 hospital laboratories submitted data.

Yet, those 7,000 hospital labs represent 26% of Medicare spending on clinical lab testing, and, by one estimate, commercial insurers often pay hospital labs 1.5 to four times more than what they pay large independent labs for the same laboratory tests, the lawsuit explains. By another estimate, some private payers pay hospital labs 160% more than Medicare pays, while other labs get paid much less than Medicare pays, the lawsuit adds.

Data Skewed In HHS’ Favor

By using data that came overwhelmingly from independent and physician office labs, the payment-data-collection program skewed the data in HHS’ favor, noted ACLA in its lawsuit. The federal Centers for Medicare and Medicaid Services (CMS) used that flawed data to set the 2018 Clinical Laboratory Fee Schedule, which went into effect on Jan. 1.

Written by lawyers Mark D. Polston and Ashley C. Parrish of the law firm King & Spaulding in Washington, D.C., the ACLA lawsuit says it seeks to prevent significant disruptions to the nation’s healthcare system by correcting the Secretary of Health and Human Service’s refusal to comply with an unambiguous directive by Congress.

In 2014, Congress passed PAMA to permanently replace the sustainable growth rate (SGR) formula used to set Medicare payment rates for physician services. Congress used PAMA to also modernize the Medicare program by ensuring that reimbursement from CMS to clinical diagnostic laboratories closely reflected the payments that laboratories receive from commercial payers.

“One of PAMA’s central features is a congressional mandate that the secretary collect information from all ‘applicable laboratories’ regarding the private-sector payments they receive,” the lawsuit says.

Defining ‘Applicable Lab’

The definition of the term “applicable laboratory” is a central part of the ACLA’s argument and is critical to the success of the ACLA’s lawsuit. PAMA was unambiguous in that it said all “applicable labs” should have been included in the payment-data-collection effort, the lawsuit explains. THE DARK REPORT has reported on these facts extensively since CMS announced and published the final rule to implement the payment-data-collection program. (See TDRs, July 5, Nov. 7, and Nov. 28, 2016; Feb. 21, Apr. 3, and Oct. 9, 2017.)

“The statute defines ‘applicable laboratory’ broadly to include any laboratory that obtains a majority of its Medicare revenues from fee schedules used to reimburse laboratories for testing services provided to beneficiaries who are not registered hospital patients,” the lawsuit says. “As the Secretary has acknowledged, Congress designed the statute to require the Secretary to collect private-sector information from all significant participants in the laboratory market. A major component of that market is the thousands of hospital laboratories that, in addition to serving hospital patients, compete with other laboratories to provide services on an outreach basis to non-hospital patients.”

In ACLA Lawsuit, Lawyers Outline Three Reasons Why PAMA Market Price Rule Should be Withdrawn

IN CONCLUDING THE INTRODUCTION to its federal lawsuit against the Secretary of Health and Human Services, the lawyers for the American Laboratory Association offer three reasons why the final rule should be vacated.

“First, the final rule is contrary to and cannot be reconciled with the plain statutory requirements. Indeed, the rule is such a clear violation of Congress’s unequivocal commands and so exceeds the express limits that Congress imposed on the Secretary’s authority, it should be struck down as ultra vires,” the lawsuit says. defines ultra vires as being beyond one’s legal power or authority.

“Second, the final rule is unreasonable. The Secretary’s attempt to rewrite the statute to exempt hospital laboratories from the reporting requirements is inconsistent with the statute’s design, structure, and purpose.

‘Arbitrary and Capricious’

“Third, the final rule is arbitrary and capricious. The Secretary’s only reason for exempting hospital laboratories from their statutory reporting obligations—the purported administrative challenges of determining which hospital laboratories meet the statutory requirements—cannot justify his failure to comply with the statute that Congress enacted. The Secretary has also failed to respond meaningfully to comments, brushing off with no reasoned explanation both serious objections to this approach and proposed alternatives that would have complied with Congress’ directives,” said the lawsuit.

After outlining these three reasons, the lawsuit explains the consequences of leaving the final rule in place. “If the Secretary’s statutory violation is not corrected, the consequences will be severe,” the lawsuit says.

Far Below Private Rates

“Because the data-collection parameters imposed by the final rule are destined to lead to the Secretary establishing payment rates that are far below private-sector rates, some laboratories will be forced out of business, others will be forced to scale back essential services, and patients will be deprived of the services they need,” said the lawsuit. “Instead of modernizing the Medicare program to better reflect the private sector market, as Congress intended, the Secretary’s statutory rewrite has put his own parochial interests ahead of the program and subverted Congress’ reforms.

“None of this should be allowed to occur. Instead, the court should enforce the statute as written and strike down the Secretary’s final rule,” the lawsuit adds.

Was Congress Contradicted?

When HHS officials drafted the rules clinical labs needed to follow in their reporting private payer lab test payment data, it contradicted the instructions Congress included in Section 216 of the PAMA statute, the lawsuit argues.

“In implementing his data-collection obligations, the Secretary promulgated a final rule that unlawfully rewrites the definition of ‘applicable laboratory’ and contradicts Congress’ express instructions,” the lawsuit says. “HHS did so by defining an ‘applicable laboratory’ as one that bills Medicare under its own National Provider Identifier (NPI).

“The Secretary’s final rule requires that to qualify as an ‘applicable laboratory,’ the laboratory must bill the Medicare program under its own National Provider Identifier (NPI),” the lawsuit says. “As the Secretary has acknowledged, that requirement excludes virtually all hospital laboratories from the data-reporting obligations that Congress imposed, because most hospital labs do not have their own NPI. Instead, they bill Medicare for laboratory services under the NPI used by the hospital as whole.

Is the ‘Hidden Data Tab’ the Smoking Gun? What Excel Reveals About HHS’ Calculations

IN THE LAWSUIT, THE LAWYERS EXPLAIN that when making its calculations for the 2018 Clinical Laboratory Fee Schedule, Health and Human Services may have inadvertently exposed a bias in the calculations of market price data.

When HHS published the new payment rates for clinical labs under the 2018 Clinical Laboratory Fee Schedule, the department inadvertently failed to delete a “hidden data” tab that was included with the Microsoft Excel file online.

Under this “hidden data” tab, the lawsuit says, were “columns labeled ‘payment difference’ and ‘payment percentage change’ comparing what appears to be the ‘count’ of HCPCS codes when the data from two large independent laboratories is included and excluded. As of March 5, this Excel file was available online on the CMS website, via this link:

By reviewing the data on this tab, it is possible to see how those doing the analysis at HHS viewed the effect of including or excluding data from the two largest independent laboratories. The lawsuit explains that this tab, “shows that the Secretary understood that collecting data principally from large independent laboratories (and excluding hospital laboratories) would result in a data set that would dramatically reduce Medicare payments.

“The consequences of the Secretary’s data-collection efforts are significant and underscore just how far he missed the mark set by Congress,” the ACLA lawsuit says.

Exempting Hospital Labs

“The Secretary’s final rule also effectively reads the ‘majority of’ Medicare revenues requirement out of the statute, exempting hospital laboratories from their statutory reporting obligations, even when a majority of their Medicare revenues are from the fee schedules that Congress specified,” the lawsuit explains.

“This rewrite of the definition of ‘applicable laboratory’—excluding by executive fiat an entire category of market participants from the data-reporting requirements— violates the statute and dramatically undermines the purpose of Congress’ mandate that the Secretary collect private-sector information,” the lawsuit adds.

This argument is important because hospital labs represent more than a quarter of Medicare spending on clinical lab tests. “In 2016, hospital laboratories received approximately 26% of the payments made under Medicare for providing laboratory services to non-hospital patients,” the lawsuit says.

“But out of the approximately 7,000 hospital laboratories that billed Medicare for services provided to non-hospital patients, no more than 21 reported information to the Secretary—less than half of one percent of all hospital laboratories in the country,” the lawsuit adds. Among payments under the CLFS, independent labs get 55% and physician office labs get 18%, according to data from the HHS Office of Inspector General.

By itself, this flaw in the payment-data-reporting system undermined the entire data-collection effort, as the lawsuit explains. “Because hospital laboratories often receive higher private-sector payments for the testing services they provide—as much as 1.5 to four times higher than the rates paid to large independent laboratories—the Secretary’s final rule ensures that, contrary to Congress’ intent, the information collected by the Secretary does not reflect the private-sector market as a whole,” the lawsuit says.

In the lawsuit, the lawyers asked for a summary judgment, in which a court is asked to rule for the plaintiffs without a full trial. HHS’s response to the ACLA motion for summary judgment is due on March 16.

A Way to Challenge the Rule?

In recent months, THE DARK REPORT has interviewed several attorneys knowledgeable about the clinical laboratory industry and federal law to have them comment on what issues would allow labs to challenge how HHS and CMS interpreted the language of the PAMA statute to design a final rule for the private payer market price study, then used those data to set new lab test rates.

The consensus was that, because the PAMA statute and the final rule on market price reporting both have language that prevent a court challenge to the rates published by CMS, labs would be unable to sue on that basis.

However, these attorneys generally agreed that there was ample legal precedent for clinical laboratories to file a lawsuit that challenged how the federal agencies interpreted the language of the PAMA statute and used that interpretation to write a final rule and design a program to collect private payer lab test price data—the same data that CMS would use to determine the Part B CLFS prices.

ACLA Explains Why Legal Challenge Is Warranted

WHEN CONGRESS PASSED the Protecting Access to Medicare Act of 2014, it added a section to the law that stated that labs could not challenge the rates that resulted from the law. Those new rates for the Medicare Part B Clinical Laboratory Fee Schedule went into effect on Jan. 1.

In filing its lawsuit against the Secretary of Health and Human Services, the American Clinical Laboratory Association did not challenge the rates that the federal Centers for Medicare and Medicaid Services set under the law. Rather, the lawsuit challenges the way the federal Department of Health and Human Services implemented the law.

“There is no doubt that Congress knows how to bar judicial review when it wants to,” the lawsuit explains. “In a separate provision of PAMA, Congress prohibited judicial review of the Secretary’s “establishment of payment amounts.” But Congress did not state that the payment-data-collection could not be challenged.

“Congress’ decision to include an express provision precluding challenges to the ‘establishment of payment amounts,’ but not to include a provision precluding challenges to the Secretary’s final rule establishing the ‘parameters for data collection,’ demonstrates that Congress did not intend to strip courts of jurisdiction to review the secretary’s final rule,” the lawsuit explains. “It is axiomatic that ‘[w]here Congress includes particular language in one section of a statute but omits it in another section of the same act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.”

Since the ACLA filed the lawsuit, amicus briefs in support of ACLA have been filed by AdvaMed, the American Association of Bioanalysts, the College of American Pathologists and the National Association for the Support of Long Term Care.


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