February 5, 2023

Volume XIII, Number 36

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February 03, 2023

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Appellate Court's Reversal in AHA v. Azar Poses Existential Threat to Medicare Outpatient Prospective Payment System


On 17 July 2020, the U.S. Court of Appeals for the District of Columbia Circuit published its opinion in American Hospital Association (AHA) v. Azar,1  in which it reversed the lower district court’s ruling2  and found that the U.S. Department of Health and Human Services (HHS) had properly exercised its authority in allowing the Centers for Medicare and Medicaid Services (CMS) to implement a service-specific, non-budget-neutral reimbursement cut under the Outpatient Prospective Payment System (OPPS). While the appellate court’s decision is superficially well-reasoned in that it made sure to at least mention all of the moving parts in the applicable statute, the opinion offers a classic example of a court losing the forest for the trees—specifically, the court failed to understand the degree to which CMS’s action to alter payment for a set of services contravenes the regulatory framework and statutory intent of the OPPS. As a result, the practical effect of this outcome is that it upends the predictability of OPPS as a payment system governed by steadfast rules mandated by Congress, going forward. If the decision is allowed to stand, CMS is likely to devise increasingly aggressive interpretations of the provisions at issue here, which puts the delicate service and payment delivery systems at further risk.


Although the facts of this case are well-known, it is useful to recall the context that prompted its filing. Each year, CMS sets the rates at which Medicare will reimburse hospitals for providing outpatient services under the OPPS. The parameters of the system are set by statute;3 one of the statutory requirements is that any changes to the OPPS must be “budget neutral,” meaning that an increase or decrease in projected spending must be offset by other changes.4

While the payment rate for outpatient services is controlled by the OPPS, the quantity of services is not. Thus, an increase in the amount of services provided will cause an increase in overall Medicare expenditures. Congress addressed that possibility in subparagraph (2)(F) of the OPPS statute, which directs HHS to “develop a method for controlling unnecessary increases in the volume of covered [outpatient] services.”5  

As the quantity of outpatient services at hospital off-campus provider-based departments (PBDs) has increased in recent years, Congress addressed this issue by enacting section 603 of the Bipartisan Budget Act of 2015,6  which reduced outpatient payment rates for all services furnished at off-campus PBDs coming into existence after the statute’s enactment, but did not alter reimbursement rates for existing off-campus PBDs.

In the calendar year (CY) 2019 OPPS proposed rule, CMS proposed to exercise its subparagraph (2)(F) authority to “develop a method for controlling” the increase.7 Specifically, CMS proposed to cut reimbursement rates for evaluation and management (E&M) services to all off-campus PBDs to the amount CMS pays to freestanding physician offices for providing the same service. Notably, CMS proposed to implement the E&M reimbursement cut in a non-budget-neutral manner—although the OPPS statute generally requires annual rate adjustments to be budget-neutral, the agency indicated in the proposed rule that it did not believe that requirement applied to methods for controlling volume under subparagraph (2)(F).8 CMS finalized the rule as proposed; AHA and litigants representing hospitals, individually, including K&L Gates LLP (K&L Gates) lawyers, filed suit shortly thereafter.


The appellate court noted that the central question at issue is whether CMS “may reduce the OPPS reimbursement for a specific service, and may implement that cut in a non-budget-neutral manner, as a method for controlling unnecessary increases in the volume of the service.”9 Setting aside the legal analysis of that question, it is obvious even to the casual observer, that if the court were to find CMS has that authority, the logical end result is the potential for a dismantling of the key statutory component of the OPPS, which is that changes must be budget neutral. If CMS can select certain services for payment reductions merely based on the rationale of controlling volume increases, it is essentially no longer constrained by statute to do the careful recalibration of case rates, going forward, and can start pruning those services it disfavors with only a small showing sufficient to meet the very lax arbitrary and capricious standard.

That perspective should have been the unifying framework undergirding the court’s analysis. The lower court understood this to be the key issue when it emphasized that “Congress provided great detail in directing how CMS should develop and adjust [OPPS] payment weights…This extraordinarily detailed scheme results in a relative payment system which ensures that payments for one service are rationally connected to the payments for another and satisfies specific policies considered by Congress. And so that this system retains its integrity, CMS is required to review annually the relative payment weights of [outpatient] services and their adjustments based on changes in cost data, medical practices and technology, and other relevant information.”10 When the OPPS was created by Congress, the main intent was to provide CMS with a system to better predict and manage program expenditures by assigning fixed payment amounts to groups of services similarly to the inpatient prospective payment system (based on Diagnosis-Related Groups).11The appellate court noted that process is extremely complex and requires CMS to complete a number of steps to ensure it meets the statutory requirements established by Congress.  

Ultimately, the court concluded that CMS may reduce OPPS reimbursement for a specific service, and may implement that cut in a non-budget-neutral manner, because Congress did not “unambiguously forbid” the agency from doing so.12 The court rested this conclusion on the rationale that the subparagraph (2)(F) provision “simply says nothing about budget-neutrality,” and that “[t]he text Congress enacted thus lends considerable support to the agency’s reading of the statute.”13Furthermore, the court noted that the OPPS’s budget neutrality requirement offers little protection that cost-control measures implemented by CMS will disproportionately affect only some service providers and beneficiaries, as warned by AHA.14 The example the court provided was that whether CMS implements a reduction in reimbursements for cardiac catheterizations and then redistributes the savings across the OPPS, “that still hurts cardiologists much more than orthopedists even if cardiologists would get some money back in the form of slightly elevated reimbursements for other services they provide.”15

Yet this conclusion flies in the face of the entire regulatory scheme of the Medicare prospective payment systems. For example, the only way in which Congress allows CMS to implement payment reductions under the Medicare physician fee schedule (PFS) is to reduce payment to the standardized amount. Given that the PFS cost control formula was clearly the model for the OPPS budget neutral requirement, the court has completely misunderstood the purpose of this protectionary provision. The point is not that cardiologists will be hurt by a rate reduction for their services and a corresponding increase in rates for orthopedic services, but rather, that a primary feature of the OPPS is that payment rates for services are established holistically so that outpatient services are furnished “in the most efficient way by enabling hospitals to manage their resources with maximum flexibility, thereby encouraging long-term cost containment.”16

Finally, the court’s acknowledgment of the significant complexity in determining OPPS payment rates as well as the statutory requirements makes its decision all the more puzzling. In failing to recognize the fragility of the OPPS without the budget neutral requirement, and the careful balancing process that Congress clearly intended to require CMS to perform when adjusting payment rates, the appellate court’s decision gives CMS carte blanche to cut payments to any service that the agency decides is over-utilized, and to do so without having to reallocate those funds back into the OPPS payment pie. This is very troublesome for a number of reasons, including that CMS no longer has to look at the medical necessity of specific services rendered to specific patients. Rather, it simply can decide to pay less, or not at all, for a service under this new authority. It completely disrupts the existing system.  

The AHA has requested that the appellate court rehear the case, noting that the court “declined to strictly construe the statutory authority that binds the agency, [and] unaccountably deferr[ed] to impermissible agency decisions.”17 If that request is denied or a subsequent rehearing is unsuccessful, the AHA may appeal the decision to the Supreme Court. The question it faces will be how to make sure the Court accepts the appeal, and then to ensure its arguments frame the issue for the Court in a manner emphasizing that the appellate court’s decision puts the delicate delivery system at risk. If the decision is allowed to stand, CMS will likely come up with increasingly aggressive interpretations of the provisions at issue here.


The appellate decision is not only a significant setback for the AHA and the hospitals it represents, but a threat to the entire methodology on which the OPPS is based. If the decision is allowed to stand, it is likely to result in significant changes to how CMS establishes payment rates under the OPPS.  

Copyright 2023 K & L GatesNational Law Review, Volume X, Number 212

About this Author

Andrew D. Ruskin Health Care Attorney K&L Gates Washington, D.C.

Andrew Ruskin is a partner in the firm’s Washington, D.C. office. He is a member of the health care and FDA practice group.

Areas of Focus 

  • Health Care and FDA
  • Food, Drugs, Medical Devices, and Cosmetics (FDA)
Gabriel T. Scott Health Care Attorney K&L Gates Research Triangle Park, NC

Gabriel Scott is an associate in the firm’s Research Triangle Park office where he practices health law. Mr. Scott applies his prior experience in government, private practice, and healthcare delivery to assist clients in identifying practical legal solutions to complex regulatory matters. His practice focuses on resolving compliance and reimbursement issues for hospitals and other healthcare providers, with an emphasis on:

  • Advising clients on a wide range of regulatory and transactional matters, including Medicare enrollment, state licensure, patient...
Darlene S. Davis, KL Gates, Healthcare transactional matters lawyer, HIPAA privacy attorney

Ms. Davis is a partner in the Research Triangle Park office. She focuses her practice exclusively on health law, primarily representing academic medical centers, health systems, hospitals, home health agencies, hospices, nursing homes, and ancillary service providers, such as laboratories, pharmacies, and durable medical equipment suppliers.

In that capacity, she advises clients on a wide range of regulatory and transactional matters, including the HIPAA privacy, security and breach notification rules; Medicare and Medicaid enrollment and...