In Lawsuit Against HHS, ACLA Has Strong Positions

Case hinges on data collection process, and whether ACLA has a legal right to sue

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CEO SUMMARY: Rulings from Judge Amy Berman Jackson of the U.S. District Court in Washington, D.C., are expected soon in the ACLA’s lawsuit against HHS concerning the PAMA final rule that set the course for the new Medicare CLFS rates implemented in January 2018. One lawyer following the lawsuit explains that ACLA has presented strong arguments. How quickly the case will move beyond the initial motion stages is unknown.

CLINICAL LABORATORIES NATIONWIDE are coping with the financial consequences of the new lower payment

rates the Medicare program imposed on Jan. 1. Meanwhile, the civil case that the American Clinical Laboratory Association (ACLA) brought against the federal Department of Health and Human Services (HHS) puts forth reasonably strong arguments in its favor, says a lawyer following the case.

Late last month in U.S. District Court for the District of Columbia, federal Judge Amy Berman Jackson denied a request from the ACLA to schedule oral arguments in its case against HHS Secretary Alex M. Azar. In response to the ACLA’s request, Jackson wrote, “The court is well aware of the parties’ interest in expedition and will set a hearing if and when it deems it necessary to do so.” Jackson also is hearing arguments in Special Counsel Robert Mueller’s investigation into Russian meddling in the 2016 election.

For clinical laboratories, any delay may mean more clinical labs will close, as ACLA argued in its request to move the case to oral arguments. While ACLA awaits a court date for oral arguments, clinical lab directors may want to know the strength of the ACLA’s case. To address this issue, THE DARK REPORT turned to Charles C. Dunham, IV, a partner in the Houston and New York offices of the Health Care and Life Sciences practice of the national law firm Epstein Becker Green, PC.

Statutory Bar in Question

Dunham acknowledged that both sides in the case have good legal arguments. While HHS has the strength of agency discretion and favorable case law on its side, the ACLA, however, has strong positions on at least two of the most important issues in the case, he said.

First is a preliminary issue of whether the ACLA is precluded from seeking judicial review of the actions HHS took based on language in the Protecting Access to Medicare Act (PAMA) of 2014. The act specifically precludes “administrative or judicial review of the establishment of payment amounts under Section 216 of PAMA.”

ACLA argued that the statutory bar is limited and does not preclude the right to challenge HHS acting outside of its statutory authority, Dunham explained. In rebuttal, HHS argues that the ACLA’s challenge is nothing more than a challenge to the payment amount, and the reporting of the private payer rates is integral to the establishment of the payment amount.

HHS Authority Questioned

In legal terms, this first issue revolves around whether ACLA has legal standing to challenge what HHS calls its PAMA final rule that resulted in the 2018 CLFS rates. In his analysis of the case, Dunham said that the legal arguments, as presented, favor the ACLA.

The second significant issue involves whether HHS has the statutory authority and followed the intent of Congress when it essentially redefined the term “applicable laboratory” by defining the terms “laboratory” and “revenue.”

HHS argues that the agency was tasked with crafting a definition for applicable laboratory because it believes the “statute left unspecified the precise meaning of a laboratory and how to determine its received revenue,” Dunham explained. ACLA argues that there is no ambiguity in the statute with regard to these terms, and instead of clarifying any questions concerning how to calculate the Medicare revenue a laboratory receives, HHS effectively rewrote the statutory definition in contrast to the statute’s plain text and inconsistent with Congressional intent, added Dunham.

Review of Legal Briefs

After reviewing the legal briefs on both sides of this issue, Dunham said the legal arguments more favor ACLA but HHS dropped the ball on its approach to arguing its position.

“There is no disagreement that the term ‘laboratory’ under PAMA was meant to include all laboratories—hospital, physician, and independent,” Dunham explained. “The statute even makes reference to hospital labs in clarifying that Medicare payments to hospital labs will be affected when a hospital lab provides test services that are paid for separately.

“Clearly, there was congressional understanding of the distinction and how hospital labs in particular were paid,” he said. “The logical conclusion would be that a laboratory is any entity licensed under CLIA. That’s very clear.

“Then, the real question HHS faced was: How does a laboratory calculate the Medicare revenue received from activities that labs perform, especially for hospital and physician office labs,” Dunham said. “HHS admittedly struggled to address these issue, but instead of providing a framework for hospitals to attribute Medicare bundled payments under PPS to laboratory services, it chose to redefine a laboratory by its NPI.”

Congressional Intent Debate

“Doing so affected which labs are deemed an ‘applicable laboratory’ and required to report the private payment-rate data that HHS collected, and, in fact, HHS acknowledged in its analysis that it had data from some labs but not from others,” noted Dunham. “For example, more than 90% of all hospital labs were not included when HHS collected the payment-rate data. Given that health insurers and the federal Medicare program pay hospital labs more than they pay independent labs for the same tests, leaving out hospital labs skews HHS’ results.”

How HHS attributed revenue to hospital labs may have been part of the problem. “Because HHS pays for laboratory services in many different ways, how do you attribute payments under the Hospital Outpatient Prospective Payment System (OPPS) or other bundled payment arrangements?” Dunham acknowledged. “And how do you pull out the lab portion of those payments? Do you define it by a percentage, for example?”

HHS’ decision to argue that the statute was ambiguous and required HHS to define the terms ‘laboratory’ and ‘revenue’ may prove to be harmful to its case, Dunham suggested. Instead, HHS may have been better served to refocus the argument, not on whether the statute was ambiguous, but on the practical problems that required HHS to establish a framework for calculating Medicare revenues related to lab services, he said.

“ACLA did a nice job arguing this point when it said that, instead of clarifying the term ‘laboratory,’ HHS effectively replaced the term ‘laboratory’ with ‘any entity within an NPI that has at least one component that is a laboratory,’” Dunham commented. “The problem with this method is that hospitals get so much Medicare revenue and if that’s how HHS is defining a ‘laboratory’ for calculating ‘revenue’, then HHS is not actually focused on the laboratory portion of that revenue.

“That’s a very strong argument on ACLA’s part,” he added. “ACLA argues that, essentially, HHS has now redefined the term ‘laboratory’ from what the Congressional intent was. In addition, ACLA should be able to challenge the fact that HHS did not have the statutory authority to redefine the term ‘laboratory’ and thus change the whole construct.

PAMA Language Precludes Review, But Lawyer Says ACLA Can Proceed with Its Legal Case

ONE ARGUMENT the federal Department of Health and Human Services (HHS) raised in this case is whether the American Clinical Laboratory Association (ACLA) has standing to bring the case at all.

“In this case, Congress included language in PAMA that precludes a challenge to certain HHS actions, and Congress was explicit on what was barred,” stated Charles C. Dunham, IV, of Epstein Becker Green. “The statutory bar removes the ability to challenge HHS’ establishment of payment amounts. HHS cited supporting case law that reinforces the concept that Congress can prevent judicial review, including the ability of the federal agency to define a payment formula and choose specific data.

“In my opinion, however, that’s not what ACLA is challenging in its case,” he noted. “ACLA points out there is a difference between the process of making rules that are inconsistent with the statute and the process under PAMA of HHS taking the information that’s received and calculating it based upon the weighted median formula to establish payment rates based on those calculations. For example, whether HHS received all applicable information available to calculate the Medicare rate would likely not be challengeable based on the statutory bar.

“What could be challenged is the fact that HHS didn’t receive all the information required under statute to make an accurate assessment of payment rates because it redefined statutory definitions and thereby altered Congressional intent,” Dunham said.

“In addition to those questions, ACLA is arguing that HHS didn’t follow the statute,” he added. “That’s an important distinction: whether, in fact, HHS acted beyond its authority in promulgating these final rules, and in doing so, may have excluded data in conflict with PAMA. That’s what ACLA is saying, and that’s a point that should certainly be subject to challenge.”

After he explained the judicial review issue, Dunham added two additional legal points, both of which appear to favor the ACLA’s case, he said. “First, I would add that HHS had minimal discretion in what laboratory was an ‘applicable lab,’” he explained. “In other words, the formula for determining an applicable laboratory was defined in the statute except for the ability of HHS to define the minimum threshold of Medicare revenues from CLFS and PFS.

Hospital Labs Carved Out

“In the way it promulgated the rules under PAMA, HHS did, in fact, carve out almost all hospital labs,” he said. “That’s the issue ACLA is challenging, and it’s a decent legal argument.”

Dunham’s second point related to whether ACLA has legal standing to bring this case, and HHS has argued that ACLA does not have such standing. “Standing is the ability of ACLA to bring a suit on behalf of its association members,” he explained.

“HHS has argued that there has been no injury to labs and no demonstration that Medicare rates are impacted because many hospitals were not required to report,” he said. “Oddly enough, HHS also argues that administrative remedies were not exhausted, which contradicts what HHS has been saying: that the establishment of the payment amounts could not be challenged under the statutory bar.

“Therefore, the standing issues are more in favor of the ACLA,” he said. “HHS doesn’t have strong arguments on lack of standing.

“ACLA made it clear by stating bluntly that HHS didn’t cite any case in which a court concluded an association lacked standing,” he said. “ACLA also said it was not aware of any such case. So on the standing issue, this is not likely to be a hurdle that will stop ACLA from moving forward.”

A Weakened Argument

“HHS could have easily resolved this problem with an adjustment factor,” Dunham suggested. Hospitals could have attributed payments from Medicare OPPS for lab services using a formula that accounts for the share of payments that should be apportioned for lab testing, he explained. Doing so likely would have been an easier task than following the reporting obligation under PAMA.

“That was an available option and none of the case law that HHS cites in its motion papers indicates HHS was precluded from doing so,” Dunham explained.

“These calculations can be performed without the need to redefine what ‘laboratory’ and ‘revenue’ mean under PAMA,” he added. “That is ACLA’s argument: that this can be done without carving out significant portions of laboratories in the market.

“HHS asserts that its data-collection efforts resulted in fair representation from all clinical labs, and in doing so, HHS weakens its case, because HHS’ own data show that only 21 out of 7,000 hospitals reported to CMS,” Dunham suggested. “HHS might have a stronger argument if it established an equitable process for collecting data from all or most laboratories,” he concluded.

THE DARK REPORT provided these legal perspectives from Dunham to help pathologists and clinical lab executives understand that the plaintiff, ACLA, has several points to argue in support of its position in this lawsuit.

Other Important Issues in ACLA vs. HHS Lawsuit

IN HIS REVIEW OF THE LAWSUIT FILED by the American Clinical Laboratory Association against the Secretary of Health and Human Services, attorney Charles C. Dunham, IV, identified two more issues of relevance in this case.

Along with the issues of Statutory Bar and Standing discussed in the accompanying story, Dunham mentioned two other underlying issues.

First, did HHS violate its statutory authority in promulgating the final rules (ultra vires)? Second, if HHS did not, should HHS be afforded agency discretion (Chevron case) in its approach to define how a laboratory calculates its Medicare revenues by its NPI? Space limitations prevented THE DARK REPORTfrom providing Dunham’s detailed comments on these two legal issues in this lawsuit.

Contact Charles Dunham at 713-300-3211 or


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