Federal Court Strikes Down Part of Surprise Billing Rule

A federal district court in Texas issued an opinion on February 23, 2022 (Decision) in which it concluded that the involved governmental agencies made some significant missteps in promulgating regulations under the No Surprises Act (NSA).  The NSA took effect on January 1, 2022 and establishes federal protections against surprise medical bills.  The law and its implementing regulations are complex and have many components.  This post will focus only on the issues addressed in the Decision and related issues relevant to healthcare providers.

First, here’s some important background on the NSA and the regulations.

On December 27, 2020, Congress enacted the NSA to address surprise medical bills.  The NSA limits an insured patient’s responsibility for out-of-network costs when receiving emergency care or for non-emergency care at an in-network facility provided by an out-of-network provider.   Additionally, the NSA seeks to promote cost transparency by requiring healthcare providers to issue good faith estimates of the cost of services under certain circumstances.  I’m glossing over a lot of detail here in the interest of brevity.

With just over a year to promulgate regulations for the NSA, the Departments of Health and Human Services, the Treasury and Labor (Departments) jointly drafted and issued three interim final rules between July and November of 2021.  The term “interim final rule” means that the Departments did not follow the usual process for creating regulations, which requires a notice and comment period.  More on that in a minute.

Here’s what each interim final rule addressed:

  • 7/1/2021: Requirements Related to Surprise Billing (Part I) – These regulations limit surprise billing for insured patients who receive emergency care, non-emergency care from out-of-network providers at in-network facilities, and air ambulance services from out-of-network providers.
  • 9/30/2021: Requirements Related to Surprise Billing (Part II) – These regulations:
    • Establish an independent dispute resolution (IDR) process to determine out-of-network payment amounts between providers and insurers.
    • Require good faith estimates of medical items or services for uninsured (or self-pay) individuals.
    • Establish a patient-provider dispute resolution process when the cost substantially exceeds the good faith estimate.
    • Provide a way to appeal certain insurer decisions.
  • 11/17/2021 – Prescription Drug and Health Care Spending

After the release of Part II, a Texas medical provider and medical association (Plaintiffs) sued the Departments to challenge the regulations under the Administrative Procedures Act (APA).  The Plaintiffs claimed that: (1) the IDR process detailed in Part II conflicts with the actual statutory language in the Act with respect to deciding payment disputes; and (2) the regulations were not subject to notice and comment as required under the APA.   The Court agreed with the Plaintiffs on both counts.

At the heart of the Plaintiffs’ claim are the regulations regarding the framework for deciding disputes between providers and insurers when they disagree on the payment the insurer must make to the out-of-network provider.  The NSA provides five factors that “shall” be considered by the arbitrator of the dispute during the IDR.  The regulations in Part II, however, create a rebuttable presumption that one of those factors (the insurer’s median in-network rate) controls unless the other party overcomes that presumption.

The Court concluded that Congress “spoke clearly” on the issue and, therefore, the Departments’ creation of a rebuttable presumption should not be afforded deference.  It said 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.”  Decision, at p. 19.  “Because the Rule ‘rewrites clear statutory terms,’ it must be held unlawful and set aside on that basis alone.”  Id. at p. 21.

Next, the Court considered the Departments’ failure to provide a notice and comment period as part of the rulemaking process.  The Departments, none of which operate healthcare providers, promulgated extensive and complex regulations without giving the regulated community an opportunity to comment on the impact of those regulations and suggest changes.

The Court explained that “[t]he purpose of the notice-and-comment requirement is to assure fairness and mature consideration of rules having a substantial impact on those regulated and for the agency to disclose its thinking on matters that will affect regulated parties. . . Unless an agency can show an exception to the APA’s notice-and-comment requirement, [a] regulation [created without notice-and-comment] is contrary to law and must be set aside.” Decision, at p. 21-22 (internal quotations and citations omitted).

Congress did not authorize the Departments to skip the notice and comment process, therefore the Departments must show good cause to avoid that process without violating the APA.  Impracticability was the Departments’ main argument.  They complained that Congress gave them only a year to create regulations.  Fortunately, the Court did not buy the argument as being sufficient for hurdling over a rule making requirement.

Finally, the Departments claimed that even if they should have provided notice and comment, failure to do so was harmless because “there is no indication that [their] conclusions would have been materially different had they first engaged in notice and comment.”  Decision, at p. 29 (citing the Departments’ brief).  In other words, the Departments would have ignored all the comments anyway.  Dismissing the argument, the Court held that “agencies cannot bypass notice and comment by claiming after the fact that they would not have changed anything.”  Decision, at p. 29.

This admonishment to the Departments is important because it reminds all federal agencies that they cannot create regulations without following the rules.  Most proposed rules undergo at least some changes after notice and comment and, in many instances, those changes result from consideration of facts and information from the regulated community.

So, what’s the effect of the Decision?  The Court ordered that the Rule related to the consideration of factors in the IDR process be vacated.  In other words, it’s back to the drawing board for the Departments on the regulations regarding the consideration of the five factors during an IDR.  Rest assured, their rule making this time will go through the notice and comment process.  Several other lawsuits have been filed on the same grounds in other federal district courts and I think a similar result is likely in all cases.

Notably, the other pieces of Part II, such as the good faith estimate provisions, remain intact.  The Court’s conclusion that the Departments’ failed to engage in the required notice and comment process may motivate others to file suit and seek to vacate other portions of Part II that place unreasonable burdens on healthcare providers (such as the good faith estimate provisions).    Until then, healthcare providers need to ensure that they are complying (or doing the best they can to comply) with the good faith estimate requirements in Part II.