CMS’s Hospital Price Transparency Final Rule and Related Legal Challenge
Legal Sidebari
CMS’s Hospital Price Transparency Final Rule
and Related Legal Challenge
January 13, 2020
Addressing the rising cost of health care, including reducing the prices consumers pay for health care
services and products, has been an area of interest for Congress and the Trump Administration. One
approach is promoting price transparency, which proponents argue could lower costs by enabling
healthcare consumers to comparison shop, prompting providers of healthcare services and products to
offer more competitive pricing. The Administration has announced price transparency proposals both in
the context of prescription drugs and health care provider services. Earlier in 2019, for instance, the
Centers for Medicare and Medicaid Services (CMS) issued a final rule that would have required direct-to-
consumer television advertisements for certain prescription drugs to disclose the drugs’ list prices. Several
pharmaceutical manufacturers sued to challenge the rule, and the U.S. District Court for the District of
Columbia agreed, in a decision that the U.S. Department of Health and Human Services (HHS) has
appealed to the D.C. Circuit, that this disclosure requirement exceeded the Secretary’s statutory authority
under the Social Security Act.
More recently, CMS, on November 15, 2019, issued a final rule (effective January 1, 2021) that requires
each hospital operating in the United States to post to the public online a yearly list of five types of
“standard charges” for every item and service it provides, discussed below. Like the drug price disclosure
rule, this hospital price transparency rule has sparked debate and drawn a legal challenge by entities—
here, several hospitals and hospital associations—affected by the rule. Given the legal challenge, this
sidebar provides an overview of the CMS hospital price transparency final rule, the bases of the legal
challenge against it, and how the legal challenge may be relevant to other legislative healthcare price
transparency proposals that Members of Congress may continue to consider.
CMS Hospital Price Transparency Final Rule
CMS issued the hospital price transparency final rule to implement Section 2718(e) of the Public Health
Service Act (PHSA). Enacted as part of the Patient Protection and Affordable Care Act (ACA), Section
2718(e) requires each hospital operating in the United States to establish, update, and make public
annually, “in accordance with guidelines developed by the Secretary,” a list of the hospital’s “standard
charges” for “items and services provided by the hospital, including for diagnosis-related groups
established under section 1886(d)(4) of the Social Security Act.” When CMS initially implemented this
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provision in 2014, it took a less prescriptive approach and allowed hospitals to fulfill their obligations
under this requirement by making public a list of their standard charges “either in the form of the
hospitals’ chargemaster itself or in another form of their choice.” A chargemaster is a file a hospital
typically maintains that lists (often by code) all items and services the hospital may charge for and the list
prices for those items and services. Alternatively, CMS also allowed hospitals to comply with the
requirement by publicizing their policies for requesting a viewing of such a list. In 2018, CMS updated its
guidelines on Section 2718(e) to remove the latter option, requiring hospitals to post online and annually
update a list of their current standard charges “either in the form of their chargemaster itself or in another
form of their choice.”
In its November 15, 2019 final rule implementing Section 2718(e), CMS expanded the scope of required
public disclosures to five types of “standard charges” based on what CMS found to be “standard for
different identifiable groups of people”:
(1) gross charges: charges reflected on a hospital’s chargemaster, absent any discounts;
(2) payer-specific negotiated charges: charges that a hospital has negotiated with a third party payer
(e.g., a commercial health insurer) for the items and services;
(3) discounted cash price: price a hospital would charge those who pay cash for an item or service;
(4) de-identified minimum negotiated charges: the lowest charge that the hospital has negotiated
with all third party payers for an item or service; and
(5) de-identified maximum negotiated charges: the highest charge that a hospital has negotiated
with all third party payers for an item or service.
Each hospital would need to disclose online these standard charges two ways: by (1) posting a list
containing these five standard charges for all items and services the hospital provides; and (2) providing a
consumer-friendly display of all standard charges except gross charges for certain 300 common
“shoppable” services. (A “shoppable” service is generally a routine, non-urgent service that a healthcare
consumer can schedule in advance).
Legal Challenge Against the Final Rule
Shortly after CMS issued the final rule, a number of hospitals and hospital associations sued to challenge
the rule as unlawful on two principal grounds.
CMS’s Interpretation of “Standard Charges.” The first ground for challenging the new rule centers on
the plain meaning of Section 2718(e) and its use of the phrase “standard charges.” When reviewing an
agency’s interpretation of a statute it is charged with administering, courts generally apply the two-step
analysis the Supreme Court articulated in Chevron U.S.A., v. NRDC. Under step one, courts analyze the
statute’s language to determine whether the law clearly speaks to the question at issue. If so, “that is the
end of the matter” and courts must enforce the “unambiguously expressed intent of Congress.” If,
however, the statute leaves a gap or is ambiguous, courts then “typically interpret it as granting the agency
leeway to enact rules that are reasonable” in nature. Under this step two analysis, courts will generally
uphold a reasonable agency interpretation even if it is not “the reading the court would have reached.”
With respect to the new transparency rule, plaintiffs argue that Chevron analysis should stop at step one
because Section 2718(e)’s requirement to disclose “standard charges” unambiguously precludes
disclosing insurer-specific negotiated rates and discounted cash prices and is restricted to hospitals’
chargemaster charges. This interpretation, according to plaintiffs, is supported by the plain meaning of
“standard,” which means “usual, common, or customary”—a definition that necessarily excludes insurer-
specific rates that are individually and privately negotiated, as well as individualized cash discounts that a
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hospital may or may not voluntarily offer at set rates to self-pay patients. Plaintiffs also assert that
“standard charges” are commonly understood to mean “a hospital’s usual or customary chargemaster
charges,” citing in support several court cases.
In response to similar arguments that arose when CMS initially proposed the rule, CMS maintains the
term “standard charges” is ambiguous. The agency observed that term is not defined under the PHSA, nor
is the agency “aware of any historical usage of the term by the industry.” Certain stakeholder comments
addressing the earlier CMS rule on Section 2718(e) expressed concerns that “the definition of standard
charges is unclear,” as hospitals use various overlapping terms on price that can have different or
interchangeable meanings. In CMS’s view, Section 2718(e)’s reference to disclosure of “standard
charges” for “diagnosis related groups”—a type of billing code used to represent service packages-–also
suggests that the statute contemplates disclosure beyond what is in the chargemaster. A chargemaster,
according to CMS, typically contains only list prices for individual items and services and not for service
packages. Given this ambiguity, CMS believes that the statute provides discretion to define “standard
charges,” and its effort to define five standard charges based on “different identifiable groups of paying
patients”—including insured and self-pay patients—is reasonable. The payer-specific negotiated charges,
in CMS’s view, are a necessary “starting point”—when combined with the patients’ specific plan
information—for insured patients to understand their out-of-pocket cost obligations. On the other hand,
discounted cash prices—which CMS asserts many hospitals have developed and standardized—would
provide helpful cost information to self-pay patients. If the court agrees that the statutory meaning of
“standard charges” is ambiguous—a critical threshold question—it is more likely that the court would
accept CMS’s argument concerning the final rule’s reasonableness under Chevron step two.
The First Amendment. Along with challenging CMS’s interpretation of Section 2718(e), plaintiffs also
argue that the final rule unconstitutionally compels speech in violation of the First Amendment’s Free
Speech Clause. Because the Clause generally protects not only the right to speak, but also the right not to
speak, commercial disclosure requirements may implicate the Clause. In analyzing the constitutionality of
such a requirement, a threshold question for the court is the applicable standard of review.
Historically, the Supreme Court has accorded commercial speech less protection under the First
Amendment than other speech and has generally applied less rigorous standards of review to commercial
disclosure requirements. Current law still applies a relatively lenient “reasonableness” review to certain
commercial disclosure requirements under Zauderer v. Office of Disciplinary Counsel. Specifically,
Zauderer review applies if the requirement compels speech that is “factual and uncontroversial” and
related to the goods or services the speaker provides. Under this standard, the government generally need
only show that the requirement is reasonably related to a legitimate and significant government interest
and is not “unjustified or unduly burdensome.” If Zauderer review does not apply—for instance, because
the required disclosure is not “factual and uncontroversial”—higher levels of scrutiny would apply. Under
higher levels of scrutiny, the government must show an increasingly closer fit between the interest it is
pursuing and the means by which it is using to achieve that interest.
In the context of a First Amendment analysis, the standard applied can often determine the case outcome.
While lower courts have approved several commercial disclosure requirements under Zauderer review,
for instance, government actions rarely survive the highest level of scrutiny. At the same time, however,
the application of Zauderer implicates a number of unsettled legal questions. These questions include (1)
whether Zauderer, a case involving certain required disclosures in attorney advertisements, applies to
commercial disclosure requirements outside of consumer advertising, (2) when a required disclosure is
“factual and uncontroversial” for purposes of Zauderer, and (3) when such a requirement is “unduly
burdensome” under Zauderer. In addition to these questions, there are also unsettled questions relating to
the government’s evidentiary burden under each standard of review.
In the case of the new final rule, the parties will likely dispute the applicable standard of review and how
it should be applied. It is difficult to predict how a court will analyze these issues given that the final rule
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implicates many of these unsettled questions. Plaintiffs believe a standard higher than Zauderer review
applies because the final rule does not regulate disclosures in consumer advertising. Plaintiffs further
argue that the required disclosure of negotiated rates would not provide consumers with information about
their own out-of-pocket costs, which depend on the design of their specific health plans and the applicable
deductibles, co-payments, and co-insurance. Similarly, plaintiffs assert that discounted cash prices may
not accurately reflect the actual costs to self-pay patients, given that hospitals may not offer such “one
size fits all” discounts and may offer case-specific discounts that would not be reflected in the disclosed
rate. Embedded within these arguments appear to be the view that the required disclosures are also
outside the scope of Zauderer because they would be confusing or misleading to consumers and thus not
“factual and uncontroversial” for purposes of Zauderer. The required disclosure of negotiated rates is also
insufficiently tailored to survive higher scrutiny, plaintiffs argue, given that it would wipe away the
current legal protection—including trade secret protection—that allegedly applies to the highly
confidential negotiated-rates data. Such compelled disclosure would, according to plaintiffs, dampen
rather than promote price competition by removing the negotiating parties’ incentives to offer discounts.
The overall disclosure requirements under the final rule, plaintiffs also argue, are also not narrowly
tailored because they would impose enormous burdens on the hospitals, requiring the compilation of
“hundreds to thousands of columns” for “tens of thousands” of items, services, and packages.
In contrast, CMS has stated that it believes Zauderer review applies to the final rule, noting that several
lower courts have applied this standard to commercial disclosure requirements outside the advertising
context. In CMS’s view, Zauderer supplies the appropriate framework for review because the final rule
requires the disclosure of factual commercial information—i.e., rates actually negotiated or offered by
hospitals. At the same time, CMS has also expressed its views that the final rule would pass constitutional
muster under even a higher level of scrutiny. In the agency’s view, the required disclosures would
advance the government’s substantial interests “in providing consumers with factual price information to
facilitate more informed health care decisions” and in “lowering health costs.” CMS believes the rule is
tailored to achieve these interests because each type of “standard charges” is targeted to a specific group
of healthcare consumers. For instance, the government argues that the negotiated rates are relevant to
insured consumers because insurers often use those rates to determine the consumers’ out-of-pocket costs.
The rule, in CMS’s view, is also sufficiently tailored and not unduly burdensome because it does not
prohibit hospitals from conveying other information they believe would be helpful to consumers.
Implications for Legislative Transparency Proposals
The legal challenge against the hospital price transparency final rule (as well as the drug price
transparency rule) illustrates how transparency measures that take place in the highly regulated healthcare
industry often may raise not only important policy questions, but also several complex legal issues
relating to the relevant statutory framework(s) and the Constitution. While statutory ambiguities may be
addressed through legislative actions, the constitutional issues define the outer bounds of such measures.
As some Members of Congress continue to consider legislative proposals to enhance healthcare price
transparency as a way to lower healthcare costs, these legal challenges may be cases to watch, as they
may provide opportunities for the courts to clarify the relevant parameters for legislation.
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Author Information
Wen S. Shen
Legislative Attorney
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