ACLA Suit Challenges HHS’ Data-Collection Efforts

Laboratories may face uphill fight because the law specifically bars legal challenge to rates

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CEO SUMMARY: In a lawsuit filed last month, the American Clinical Laboratory Association charged that HHS failed to comply with the statutory requirements of the Protecting Access to Medicare Act of 2014 when setting the 2018 Clinical Laboratory Fee Schedule. In the lawsuit, ACLA said HHS disregarded the law’s requirement that all applicable laboratories would report relevant data. How HHS and CMS defined “all applicable labs” is the critical issue in this lawsuit, say lawyers familiar with the case.

CLINICAL LABORATORIES enter the new year seeking an answer to a critical question: Will a lawsuit succeed against the federal Department of Health and Human Services?

On Dec. 11, the American Clinical Laboratory Association sued HHS, charging that the agency failed to comply with the requirements of the Protecting Access to Medicare Act of 2014 (PAMA) which it was to follow to set the 2018 Clinical Laboratory Fee Schedule (CLFS).

In a 32-page filing in the U.S. District Court for the District of Columbia, ACLA charged that HHS disregarded the requirement in PAMA that all applicable laboratories report relevant market-rate data. How HHS and the federal Centers for Medicare and Medicaid Services defined “all applicable laboratories” is the critical issue in this lawsuit, said lawyers familiar with the filing. The defendant in the case is Acting HHS Secretary Eric D. Hargan.

Language in the PAMA statute instructed CMS to analyze what commercial health insurers paid clinical labs and to use that private-payer data to set market-based rates for 2018.

When setting the 2018 CLFS prices that went into effect Jan. 1, ACLA charged that HHS instituted a highly flawed data reporting process. More than 99.3% of clinical laboratories in the United States were prohibited from reporting market-rate data on the prices health insurers paid for lab tests, the lawsuit said.

In 2015, the lawsuit alleged, Medicare paid more than 261,500 entities for laboratory services, but only 1,942 laboratories reported market-rate information in 2016 under the PAMA final rule. Those 1,942 labs that reported market-rate data are about 0.7% of the total number of laboratories serving Medicare beneficiaries.

In addition, the lawsuit alleged, the labs that reported market-rate data did not represent the lab market as a whole. In 2015, 7,000 hospital laboratories billed Medicare for lab testing, accounting for 24% of Medicare payments made under the CLFS, the lawsuit charged. Yet, no more than 21 hospital laboratories (and probably fewer) reported market-rate payments to HHS, leaving hospital labs grossly under-represented, it said.

Hospital Labs Are Different

For many patients, hospital labs are the only ones available in certain areas of the country, the lawsuit said. And, the commercial insurance rates these labs are paid often are much higher than what other labs get, due to differences in competitive markets, service volume, and other factors, it charged.

Given the fact that fewer than 1% of all labs, and only 21 hospital labs, participated in the data-collection effort, the legal arguments are clear: the ACLA’s lawyer for the case, Mark D. Polston, will charge that the data-collection effort was flawed.

This argument is important because PAMA prohibits legal challenges to the rates that result from the law. In legal terms, this prohibition is called a review preclusion. Therefore, challenging the data-collection methods may be the strongest legal attack ACLA can bring against the law, said David W. Gee and Jordan B. Keville, partners with the law firm Davis Wright Tremaine.

For nearly 30 years, Gee has represented clinical and molecular diagnostic laboratories, pathology groups, hospital lab outreach management companies, hospitals, physicians, and other providers on legal issues, including Medicare and Medicaid compliance. Keville focuses on reimbursement and regulatory issues for healthcare providers and formerly was a partner with Hooper, Lundy & Bookman, in Los Angeles, a law practice serving providers in legal challenges involving Medicare and Medicaid payment.

In an interview with THE DARK REPORT, Keville said, “I agree with the way that ACLA framed the complaint. The lawsuit recognizes that there are two parts to PAMA, one of which addresses the information-gathering mandate from all labs for rate-setting. And the second part is the rate-setting based on the data gathered.

“In the law, the review preclusion applies only to the rate-setting,” com- mented Keville. “ACLA is not challenging the rates. Instead, ACLA is challenging the data CMS gathered and the way it went about collecting that data. That’s a valid argument.

“In response, CMS is likely to say that this argument is a de facto attack on the rates and, therefore, the review preclusion in the statute should apply,” emphasized Keville.

“But the data-gathering and the rate-setting are separate provisions in PAMA, and the statute says specifically that—as far as the data collection CMS did—the agency had to go through a notice-and-comment process under the Administrative Procedure Act,” he added.

Actions Subject to Review

“That’s important because notice-and-comment is subject to judicial review. By requiring CMS to go through the com- ment and rule-making processes, the law separates these processes from the rate-setting part of the law,” noted Keville. “That helps the ACLA side.

“There’s always a chance that a judge could find the review preclusion bars the whole suit, but I believe the case will at least get over that hurdle,” said Keville.

“Under the Administrative Procedure Act, it is typical that when regulations are produced, those actions are subject to review,” he added. “That means there is a valid argument to make—as the lawsuit charges—that CMS didn’t do the data-collection process properly, and that data-collection process got us to where we are now.

“When you look at how the data-collection was done, the 99.7% of labs that were not included in the effort is a key fact,” Keville explained. “That is a big issue because the PAMA statute instructed CMS to collect data from ‘all applicable laboratories.’

ACLA Outlines Importance of PAMA Lawsuit for Clinical Labs Facing Medicare Fee Cuts

WHEN THE AMERICAN CLINICAL LABORATORY ASSOCIATION filed a lawsuit Dec. 11 against the Department of Health and Human Services, ACLA President Julie Khani explained why the case is important to clinical labs.

“We have repeatedly advised CMS that there are significant, substantive deficiencies in the final rule, which fails to follow the specific commands of the PAMA statute,” she said in a prepared statement. PAMA is the Protecting Access to Medicare Act of 2014.

‘Will Disrupt Lab Market’

“Contrary to Congress’ intent, instead of reforming Medicare reimbursement rates to reflect the broad scope of the laboratory market, the Secretary’s final rule will disrupt the market and prevent beneficiaries from having access to the essential laboratory services they need,” she added.

Under the rules Congress wrote to comply with PAMA, the Centers for Medicare and Medicaid issued the 2018 Clinical Laboratory Fee Schedule, which calls for a cut in what CMS pays of 10% starting Jan. 1. ACLA, the American Hospital Association, the American Medical Association, and more than 20 other organizations urged CMS not to implement the new CLFS rates, saying the rates would cause clinical laboratories to struggle financially and possibly close, affecting Medicare beneficiaries’ access to clinical lab testing, ACLA said.

In the lawsuit, ACLA seeks to require HHS to set aside the provisions in PAMA Section 216 that required labs to report market rate data from private health insurers so that HHS could set payment rates for clinical lab testing that reflect the rates laboratories receive from private payers, the lawsuit said.

When it wrote the regulations for PAMA, however, HHS disregarded Congress’ instructions and “unreasonably and arbitrarily exempted significant categories and large numbers of laboratories that meet the statutory definition from the reporting requirements that Congress imposed,” the lawsuit said.

ACLA claims CMS did not act in accordance with law, that the law was constructed in an unreasonable manner, and that CMS violated the Administrative Procedure Act.

In its final section, “Prayer for Relief,” the lawsuit asks the court to vacate, “any agency action found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;” to require HHS to comply with the statutory requirements, “including faithfully implementing the statutory definition of ‘applicable laboratory;’” and enter an “injunction that (1) directs the Secretary to withdraw or suspend his final rule until such time as it can be brought into compliance with the statute, and (2) directs the Secretary to withhold applying the new Clinical Laboratory Fee Schedule until such time as the Secretary has made appropriate revisions to his final rule.”

Law Gave CMS Discretion

“That is one specific issue ACLA is asking the court to address,” he said. “ACLA is saying the phrase—‘all applicable labs’—is clear on its face. In other words, under the law, CMS should have included as many laboratories as possible, including hospital-based labs.

“CMS excluded a large percentage of labs, and that is a big factual nuance that will assist the legal arguments the ACLA lawyers are advancing,” he commented. “It doesn’t make sense to say, ‘collect data from all applicable labs,’ and then have CMS collect data only from a small percentage of labs.

“Of course, CMS will challenge this argument too,” Keville said. “When it does, it is likely to rely on how the statute gives the agency discretion to exclude low-volume labs. That discretion allows CMS some leverage to define the data-collection effort in a way to carve out some labs.

Statute’s Plain Language

“Personally, I think that’s a strained argument because it’s counter to the plain language of the statute itself, which is what ultimately should control the outcome of this case,” he said. “When making decisions, courts review the language in the prevailing statute. That said, courts also give agencies significant discretion unless the agency clearly violated language in the statute.”

While these issues are among the strongest ones to pursue, Gee and Keville also pointed out some obstacles to ACLA’s case. For example, some labs did not submit data because they found the requirements to do so to be complicated and burdensome. That failure creates an opening for HHS’ lawyers, Gee said.

“The fact that many labs, including hospital labs, didn’t submit data undermines the ACLA’s argument that labs were disadvantaged by the fact that CMS collected data from so few labs,” Gee said. “A number of labs didn’t submit data, including hospital labs with higher reimbursement experience, in particular, but they had the opportunity to do so.

“I believe the fact that some labs didn’t submit data may undermine the claim that CMS’ efforts were inadequate,” he added. “In addition, CMS may emphasize that it gathered data from the largest participants in the market, namely, Quest Diagnostics and Laboratory Corporation of America.”

How To Respond To PAMA

In addition, the clinical lab industry was aware of the issues and the risk labs faced under PAMA once it became law in April 2014. “Since then, these issues were on the top of everyone’s mind,” Gee commented. “Everywhere I went, lab professionals wanted to know how to respond to PAMA. This fact may make it more difficult to argue that labs were not given sufficient notice and opportunity to submit data to CMS.”

Keville agreed, saying, “If the clinical lab industry complains about the methodology, then the government can argue that labs had the opportunity to submit data but didn’t do so.”

However, clinical labs had many reasons not to submit market-rate data and chief among them was the fact that they found that doing so was extremely difficult. Another challenge was that CMS decided to have labs submit retrospective data, but CMS did not tell them until after the retrospective-reporting requirement period had passed.

Looking Back Was Difficult

Labs argued that they could have submitted market-rate data if they had known in advance to collect that data for a specific period. Also, labs were concerned about how reporting data incorrectly could trigger CMS audits and steep fines.

Given these concerns among labs, it’s reasonable to ask why the ACLA’s lawsuit did not address these issues. There is no mention in the lawsuit of the trouble labs had in reporting the market-based rate data. Gee and Keville responded to this point by explaining that legal complaints are drafted to emphasize the best claims to a judge or jury.

“Lawyers put in what they feel are the strongest arguments because weak arguments tend to distract from the stronger ones,” Keville explained. “Clearly, ACLA and its legal team felt that the ‘applicable labs’ issue was the strongest claim and focused on that.”

Another question that clinical labs may have about the lawsuit is why ACLA did not seek an injunction to stop the implementation of the 2018 CLFS. “ACLA’s legal team may have reasoned that seeking an injunction was not the strongest strategy,” observed Keville. “ACLA would need a temporary restraining order, and, in court, the burden is much higher to prove that a temporary restraining order (or any injunctive relief) is needed.

Needs For An Injunction

“To get such a TRO, ACLA would likely need to show that a certain percentage of labs would go out of business imminently—meaning within a matter of weeks,” he explained. “It’s not clear at this point that any labs will go out of business in such a short time.”

In addition, plaintiffs sometimes do not seek an injunction because such a ruling can be a barrier to getting eventual relief from the same court, Gee added. “Sometimes asking for injunctive review can presage what will happen next,” he said. “For example, if the court denies the restraining order, it could be difficult to get the court to move past its prior ruling when deciding the case.”

In conclusion, Gee pointed out another factor that may become an issue in this lawsuit. “Given the sensitivity to affordable healthcare, it’s always difficult to make the argument that your side is entitled to more money,” he said.

Contact David Gee at 206-757-8059 or and Jordan Keville at 213-633-8636 or

ACLA Lawyer Has Extensive Medicare Experience

TO LEAD ITS CASE AGAINST THE Department of Health and Human Services, the American Clinical Laboratory Association hired a lawyer with deep experience in the workings of the federal Medicare program.

The lawyer, Mark D. Polston, is a partner in the healthcare practice of the King and Spaulding law firm in Washington, D.C. The former Chief Litigation counsel for the Centers for Medicare and Medicaid Services, he specializes in representing healthcare providers in cases involving complicated Medicare reimbursement litigation.

Recently, he successfully challenged a proposed rate cut of 0.2% under Medicare’s so-called “Two Midnight” rule, a regulation CMS uses to distinguish an inpatient from an outpatient. Under the rule, an inpatient is one whose stay extends over at least two midnights, according to the journal Health Affairs.

In the case, Polston represented more than 200 hospitals challenging CMS’ decision to cut inpatient Medicare hospital rates. His efforts led to a reversal of the CMS policy, resulting in about $660 million in additional Medicare reimbursement to acute care hospitals, according to King and Spaulding.

Clinical lab directors may be interested to know that Polston also worked with a group of hospitals that lobbied successfully to reform the Medicare Recovery Audit Contractor program. He also led the Stark Reform Coalition, a group of hospitals seeking reform of the Stark physician self-referral law.

In the ACLA lawsuit against HHS, Polston explained why the case against the rules established under the Protecting Access to Medicare Act has merit. “CMS clearly disregarded and violated the statute’s specific, unambiguous directives requiring commercial rate information to be reported and collected from a broad, diverse group of market participants,” he said. “Instead, information was collected from less than 1% of U.S. labs.”


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