Surprise! Federal Court Invalidates CMS Arbitration Procedure under No Surprises Act
The Eastern District of Texas recently issued its opinion in Texas Medical Association v. United States Department of Health and Human Services, et al., invalidating key portions of regulations implementing the out-of-network rate-setting arbitration process mandated by the federal No Surprises Act (“Act”).
The court found that the regulation ran afoul of the Act’s plain language by setting the median in-network contract rate–referred to as the Qualified Payment Amount (“QPA”) in the Act–as the default outcome of the arbitration process instead of weighing equally all the rate-setting factors listed by Congress in the Act. Because the proposed regulation conflicted with the plain language of the Act, it was not entitled to Chevron deference and was vacated and set aside under the Administrative Procedure Act.
Congress passed the Act at the end of 2020 to protect healthcare consumers from balance billing by providers who are out of network with their health insurance plan when seeking emergency care services or when receiving physician services at an otherwise in-network facility. Under the Act, in these “surprise billing” situations, consumers are generally only liable for the in-network cost-sharing payment. The out-of-network provider and the health plan are then tasked with negotiating an appropriate reimbursement rate for these out-of-network services. Should negotiations fail, the Act provides for “baseball arbitration,” administered by the Centers for Medicare and Medicaid Services (“CMS”), in which the arbitrator must choose between the parties’ competing rate proposals.
In making that determination, the Act provides that arbitrators "shall consider … the qualifying payment amounts [i.e., the median in-network rate] … and … information on any circumstance described in clause (ii)." Clause (ii) of the Act lists five additional "circumstances" or factors to consider:
- The level of training, experience, and quality and outcome measurements of the provider or facility that furnished the … item or service,
- The market share held by the provider or facility in which the … item or service was provided,
- The acuity of the recipient of the … item or service,
- The teaching status, case mix, and scope of services of the facility that provided the … item or service, and
- Demonstration of good faith efforts (or lack thereof) made by the provider, facility, or plan to enter into network agreements with each other.
However, on September 30, 2021, in advance of the Act’s January 1, 2022, effective date, the Department of Health and Human Services, the Department of Labor, and the Department of the Treasury jointly issued an interim final regulation that established a rebuttable presumption in favor of the offer closest to the QPA, marginalizing the other factors listed in the Act to at most a subordinate status.
Plaintiff Texas Medical Association (“TMA”) is a trade association that represents more than 55,000 physicians and medical students. On October 28, 2021, TMA filed a lawsuit in the Eastern District of Texas under the Administrative Procedure Act (“APA”) challenging the proposed regulation’s rebuttable presumption in favor of the QPA as contrary to the plain terms of the Act. TMA argued that the proposed regulation effectively deprived its members of the arbitration process established under the Act. TMA further contended that the rebuttable presumption built into the regulation would “pressure healthcare providers to lower their offers toward the QPA to increase the likelihood they will be selected."
Eastern District of Texas Decision
The APA requires courts to "hold unlawful and set aside" agency action, such as issuing a regulation, that is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." When determining whether a regulation is contrary to a law passed by Congress, courts employ the two-step Chevron framework. The first step determines "whether Congress has directly spoken to the precise question at issue." "If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." However, if the statute is ambiguous, the court proceeds to step two: "asking whether the agency's construction is 'permissible.'"
Here, the court found that the Act’s use of the word “shall” showed Congress’s unambiguous intent that arbitrators consider all of the Act’s specified factors in determining the rate of reimbursement for out-of-network providers. The court noted that “nothing in the Act … instructs arbitrators to weigh any one factor or circumstance more heavily than the others.” The court held that the regulation impermissibly designated QPA as the “primary” or “most important” factor. The court noted that “[i]f Congress had wanted to restrict arbitrators’ discretion and limit how they could consider the other factors, it would have said so—especially here, where Congress described the arbitration process in meticulous detail.”
The court further held, in the alternative, that the regulation was improperly promulgated without adherence to the APA’s requirement of prior notice and comment.
As a result of these deficiencies, the court vacated and set aside the regulation to the extent that it had set a rebuttable presumption in place that the QPA alone defines the appropriate out-of-network rate.
The Texas decision is certainly a victory for providers who worried that the QPA–which is the median in-network rate–would not fully compensate for the complexities and costs of their services, especially tertiary care providers. However, the ruling also creates substantial uncertainty as it is unclear what will be the arbitration standard moving forward; while the court vacated the current regulation, it did not prescribe how a revised regulation must be constructed. Moreover, while the rebuttable presumption of the QPA as the appropriate rate created the risk of undervaluing certain services, it did have the advantage of setting a predictable standard and benchmark for health plans to use in their actuarial underwriting and premium setting. It will be important to watch how this case develops if the government appeals, as well as similar cases brought by the American Hospital Association and American Medical Association, which are pending in the U.S. District Court for the District of Columbia.
For additional information or assistance, contact Barak A. Bassman, Triston Chase O’Savio or a member of Blank Rome’s Healthcare industry group.
 Tex. Med. Ass'n v. United States HHS, 2022 U.S. Dist. LEXIS 31807, *4 (E.D. Tex. 2022).
 42 U.S.C. § 300gg-111(c)(5)(C)(i).
 45 C.F.R. § 149.510(c)(4)(ii).
 Tex. Med. Ass'n, 2022 U.S. Dist. LEXIS 31807 at *14.
 5 U.S.C. § 706(2)(A).
 Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S. Ct. 2778, 81 L. Ed. 2d 694 (1984).
 Id. at 843.
 Chevron, 467 U.S. at 843.
 Id. at *23.
 Id. at 26.
 American Medical Assoc’n et al. v. U.S. Dept. of Health and Human Servs. et al., 21-cv-03231 (D.D.C.).
© 2022 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.