Transparency in health care pricing can help patients make informed decisions, increase competition, and drive down the cost of health care. Accordingly, the Centers for Medicare and Medicaid Services (CMS) has promulgated a new rule for hospital pricing, effective January 1, 2021, that would require disclosure of a wide range of hospital prices. This blog post reviews the history, requirements, and scope of the CMS rule, industry criticisms of the rule and the lawsuit challenging it, and the prospects for compliance. While the CMS rule will not single-handedly normalize health care pricing, it at least promises to make it more transparent.
The CMS Rule
As part of the Affordable Care Act (ACA), Congress enacted section 2718(e) of the Public Health Service Act, which requires “[e]ach hospital” to “make public (in accordance with guidelines developed by the Secretary) a list of the hospital’s standard charges for items and services provided by the hospital,” and to update this list annually. For years, hospitals could satisfy this statutory requirement by publishing their chargemaster, pursuant to guidance from the CMS.
However, over time, CMS became “concerned” that chargemasters “are not helpful to patients for determining what they are likely to pay for a particular service or hospital stay.” CMS recognized that chargemasters, which provide nondiscounted, fee-for-service prices, are “usually highly inflated” and “bear little relationship to market rates.” Therefore, in August 2019, CMS issued a notice of proposed rulemaking that would dramatically expand the amount of information that hospitals would have to make public under section 2718(e). Following comments from providers, insurers, patients, consumer advocates, and others, CMS promulgated its final rule—“Price Transparency Requirements for Hospitals to Make Standard Charges Public”—in November 2019.
The final rule, which purports to define “standard charges” in section 2718(e), requires hospitals to make public five types of charges:
- Gross charges: the non-discounted rate, as reflected in a hospital’s chargemaster;
- Discounted cash prices: the rate the hospital would charge individuals who pay cash or cash equivalent;
- Payer-specific negotiated charges: the rate that a hospital has negotiated with a third-party payer (for example, an insurer) for an item or service provided in the hospital;
- De-identified minimum negotiated rates: the lowest rates that a hospital has negotiated with all third-party payers, without identifying the payer; and
- De-identified maximum negotiated rates: the highest rates that a hospital has negotiated with all third-party payers, without identifying the payer.
Under the final rule, hospitals must publish a machine-readable file containing these types of charges for all “items and services” provided by the hospital to patients for which the hospital has established a standard charge. In addition, hospitals must publish a more consumer-friendly list of these five types of charges for the hospital’s 300 most “shoppable services,” defined as “service[s] that can be scheduled by a healthcare consumer in advance.” CMS has specified 70 shoppable services that must be included in this list but left it to each hospital to select the remaining 230.
Scope Of The Rule
Constrained by the text of Section 2718(e), CMS concluded that it was unable to impose the new rule on two sets of market participants: ambulatory surgery centers (ASCs) and physicians not directly employed by a hospital.
Because Section 2718(e) requires only that “[e]ach hospital” publish “a list of the hospital’s standard charges for items and services provided by the hospital,” CMS concluded that it lacked statutory authority “to apply the price transparency requirements to non-hospital sites of care,” such as ASCs. Thus, unlike hospitals, ASCs will not have to publish their standard charges.
By not requiring ASCs to publish their standard charges, commenters have suggested that CMS’s rule could accelerate the trend of hospitals affiliating with, or acquiring ownership interests in, ASCs and then directing outpatient procedures to ASCs. According to Bain & Company, ASCs performed more than half of all outpatient surgeries in 2017, compared to one-third in 2005. As the role of ASCs in providing health care has increased, hospitals have increasingly looked to affiliate with, or acquire ownership interests in, ASCs. According to Fitch Ratings, hospitals and health systems had an ownership interest in 25–30 percent of ASCs in 2017, compared to 20 percent in 2001.
Given these trends, commenters urged CMS to amend its proposed rule to include ASCs “to minimize incentives for hospitals to defer surgeries to new ASCs formed for the purpose of circumventing disclosure of the hospital’s charges.” CMS declined to do so, citing its lack of statutory authority.
The rule also does not apply to physicians who practice at a hospital but are not directly employed by the hospital. According to CMS, although physicians who are not employed by a hospital may practice at the hospital, their services are not “provided by the hospital” under Section 2718(e).
Commenters have suggested that the exclusion of physicians not employed by the hospital is potentially significant because the vast majority of physicians are not employed by a hospital. In a survey of physicians by the Physicians Foundation in 2018, only 19.1 percent of respondents indicated that they were employed by a hospital. According to the American Medical Association’s Physician Practice Benchmark Surveys, only 8 percent of physicians were employed directly by, or contracted directly with, a hospital in 2018. In fact, several states restrict hospitals from employing physicians. For example, hospitals in California are prohibited from employing physicians to practice medicine, with limited exceptions. As with ASCs, commenters have suggested that this exemption could motivate hospitals to restructure their practices by, for example, acquiring medical foundations to reduce the number of physicians directly employed by the hospital.
Industry Criticisms Of The Rule
The health care industry has criticized the rule on a number of policy grounds. Several notable arguments are addressed below.
First, critics argue that the price information hospitals must disclose under the rule is not helpful because it does not include out-of-pocket costs. CMS responds that, although patients may pay only a fraction of the negotiated prices, negotiated prices drive out-of-pocket costs. In addition, the Department of Health and Human Services, the Department of Labor, and the Department of the Treasury promulgated a final rule on October 29, 2020, that will require health plans to disclose price and cost-sharing information to participants, beneficiaries, and enrollees. These departments also are finalizing a requirement to give consumers real-time, personalized access to cost-sharing information, including an estimate of their cost-sharing liability, through an internet-based self-service tool. Moreover, for some patients (including certain patients with high-deductible plans), negotiated prices may well be out-of-pocket costs. Finally, CMS points out that requiring hospitals to disclose prices in machine-readable format will encourage third-party services to develop tools to digest the price data.
The industry also has argued that compliance with the rule is not possible because many prices cannot be calculated in advance but instead are a function of complex algorithms. While this may be true for certain services under certain contracts, CMS has observed that hospitals have the option of stating that the information is “not available.” One effect of the rule may be to encourage simplification of hospital pricing.
Next, critics also have argued that price transparency may lead to collusion between providers. As an initial matter, it remains unclear how this concern distinguishes health care from other industries in which prices are public. In addition, CMS cited a number of studies suggesting that transparency will lead to price decreases. One study analyzing the impact of regulations in more than 30 states that required public access to hospital prices found that transparency “lowered the price of shoppable procedures…by approximately 5 percent overall compare to prices for non-shoppable procedures.” Another study cited by CMS evaluating the impact of web-based, price-transparency tools found that one user of those tools was able to reduce its costs by 10 percent to 17 percent. In short, CMS contends that the tendency of price transparency to lower costs “is consistent with…standard economic theory.”
Finally, critics claim that CMS vastly underestimates the cost of compliance. CMS estimates that, in the first year, compliance with price transparency regulations will cost $11,898.60 per hospital, and the cost will decrease to $3,610.88 per hospital in subsequent years. Providers vehemently disagree. Hospitals have estimated that compliance would cost hundreds of thousands of dollars. For example, CommonSpirit, which has more than 140 hospitals in 21 states, reported having more than 3,000 agreements with payers, each with 10–15 unique benefit designs. While CMS may have underestimated compliance costs (indeed, CMS agreed to postpone the rule’s effective date by one year until January 1, 2021), those costs should decline over time as industry-standard practices and services develop. Moreover, as it stands, the burden currently falls on patients. In fact, CMS observed that some patients have resorted to crowd-sourcing Explanations of Benefits in an attempt to determine prices.
The AHA Lawsuit
The American Hospital Association (AHA) and other industry interests wasted no time in challenging the rule, filing suit in the US District Court for the District of Columbia on December 4, 2019. Plaintiffs argued that the rule exceeds CMS’s statutory authority under the ACA, violates the First Amendment, and is arbitrary and capricious under the Administrative Procedures Act. On dueling motions for summary judgment, the court rejected each of these arguments.
First, the court ruled that CMS’s construction of “standard charges” to include negotiated rates was permissible under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 US 837 (1984). “Standard charges” does not unambiguously mean “chargemaster charges,” especially when chargemaster rates are not the amounts paid on behalf of 90 percent of hospitals’ patients. CMS’s construction was reasonable in light of the “peculiar dynamics of the health care industry” and the statute’s goal of reducing health care costs.
Second, applying the standard for commercial speech in which the information “does not contain any expressive component,” the court rejected plaintiffs’ First Amendment attack. The rule is reasonably related to CMS’s interests in promoting transparency, even if the required information does not include out-of-pocket costs: “Some accurate information is better than no information at all.” While compliance with the rule may be burdensome, that is not the type of burden on speech with which the First Amendment is concerned.
Third, the court rejected plaintiffs’ argument that the rule was arbitrary and capricious because the information will “confuse” patients. For some patients—those who self-pay and those who pay in cash—the published information is tantamount to out-of-pocket costs. CMS properly exercised its judgment in concluding that the net effect of increased transparency would be to benefit health care consumers.
The DC Circuit Court heard arguments on plaintiffs’ expedited appeal on October 15 and, on December 29, affirmed Regarding plaintiffs’ challenge under the Administrative Procedures Act, the DC Circuit Court departed from the district court’s reasoning, in that the DC Circuit Court avoided deciding whether Chevron deference applies. By sidestepping this question of administrative law, the DC Circuit Court may have helped to insulate the rule should plaintiffs seek relief before the US Supreme Court. Also of note, the DC Circuit Court addressed criticism of the rule’s purported reliance on third-party services to develop tools to digest the price data, holding that “anticipating that third-party price aggregators and researchers will bring more efficiency to an industry as large and important as healthcare hardly strikes us as irrational,” and observing that “such services are ubiquitous in other industries where prices are publicly available, such as travel booking websites and used car aggregators.” Finally, turning to plaintiffs’ First Amendment challenge, the DC Circuit Court dispensed with plaintiffs’ arguments in short order along the same lines as the district court.
Making The Rule A Reality
Small civil penalties are unlikely to motivate immediate, universal compliance. The maximum penalty for hospitals who fail to comply with the rule is $300 per hospital per day or $109,500 per hospital per year. To put that in perspective, $109,500 is equivalent to seven c-sections. CMS has reserved the right to re-visit the amount of the civil penalty. CMS could also consider conditioning participation in Medicare on compliance with the rule, although this enforcement mechanism would engender further industry opposition and legal challenges.
Similarly, the effectiveness of the monitoring and graduated enforcement scheme remains to be seen. CMS is not requiring attestations of compliance from the hospitals. Instead, CMS intends to predominately rely on complaints made to CMS by individuals or entities regarding a hospital’s potential compliance. Although CMS intends to publicize notices of the imposition of civil monetary penalties on the CMS website, hospitals generally will receive a warning and have the opportunity to submit a corrective action plan prior to the imposition of any penalties.
Following last week’s decision by the DC Circuit Court, the AHA stated that it “has urged the incoming administration to evaluate whether the rule should be revised and to exercise enforcement discretion for the duration of the public health emergency.” The incoming Biden administration has not responded publicly.
Now that the CMS’s new price transparency rule has survived legal challenges in both the district court and the appeals court, compliance remains the final hurdle. Clearing that hurdle should mark a step forward in rationalizing health care pricing and stimulating competition.