Federal Court Strikes Down Arbitration Process in the Federal No Surprises Act. What does this mean for New Jersey?

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On Wednesday, February 23, 2022 the federal District Court for the Eastern District of Texas issued its opinion finding that the September 30, 2021 interim final rule (the “Rule”) issued by the federal government to implement the arbitration system provided in the federal No Surprises Act was in conflict with the Administrative Procedure Act (the “APA”) and thus the provisions related to arbitration in the rule were set aside. The legal challenge was brought forth by the Texas Medical Association on behalf of its associated members, as well as a Texas physician named Dr. Adam Corley (the “Plaintiffs”).

By way of background, the arbitration process in question under 42 U.S.C. §§ 300gg-111(c)(5)(B) of the No Surprises Act is a “baseball-style” arbitration by which the provider and insurer each submit a proposed payment amount and explanation to the arbitrator. The arbitrator must then select one of the two proposed payment amounts “taking into account the considerations specified in subparagraph (C)” which includes, among other things, the qualifying payment amount described below (or “QPA”), the experience of the provider, the provider’s market share, and the complexity of the service.

In their challenge, the Plaintiffs argued that the Rule conflicted with the No Surprises Act’s statutory language by imposing a “rebuttable presumption in favor of the offer closest to the QPA”. Under 42 U.S.C. §§ 300gg-111(a)(3)(E)(i)(I)-(II) of the No Surprises Act, the “QPA” is generally defined to represent “the median of the contracted rates recognized by the plan or issuer…” The Plaintiffs argued that the requirements imposed by the Rule resulted in a regulatory scheme that allowed the QPA to heavily skew the arbitration process in favor of the insurers to the detriment of providers, and would in effect result in providers lowering the rates they presented in order to fall closest to the QPA in order to prevail in the arbitration. Additionally, the Plaintiffs argued in the alternative that the Rule should be vacated because the federal government failed to provide notice and comment as required by the APA.

Based on the arguments presented, the Court held in favor of the Plaintiffs and determined that (1) the Plaintiffs had standing to challenge the Rule, (2) the Rule conflicts with the unambiguous terms of the No Surprises Act, (3) the federal government improperly bypassed notice and comment in implementing the challenged portions of the Rule, and (4) vacatur and remand is the proper remedy. 

The crux of the Court’s findings with regard to the arbitration regulations in the Rule were in sum as follows:

  • The Court determined that the No Surprises Act unambiguously establishes the framework for deciding payment disputes and concludes that the Rule conflicts with the statutory text and that nothing in the Act instructs arbitrators to weigh any one factor or circumstance more heavily than the others.
  • Rather than instructing arbitrators to consider all the factors pursuant to the Act, the Rule requires arbitrators to “select the offer closest to the [QPA]” unless “credible” information, including information supporting the “additional factors,” “clearly demonstrates that the [QPA] is materially different from the appropriate out of-network rate” (or if the offers are equally distant from the QPA in opposing directions). 
  • As such the Rule “thus places its thumb on the scale for the QPA, requiring arbitrators to presume the correctness of the QPA and then imposing a heightened burden on the remaining statutory factors to overcome that presumption.”

With respect to the issue of failing to abide by the notice and comment requirements of the APA, the Court’s justifications may be summed up as follows:

  • The APA requires that agencies publish a “notice of proposed rule making” and “give interested persons an opportunity to participate . . . through submission of written data, views, or arguments.” 5 U.S.C. § 553(b), (c), in order 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.” Johnson, 632 F.3d at 931.
  • The APA requires a reviewing court to “hold unlawful and set aside” agency action that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). It is a “core administrative-law principle that an agency may not rewrite clear statutory terms to suit its own sense of how the statute should operate.” Util. Air Regul. Grp. v. EPA, 573 U.S. 302, 328 (2014).
  • As such, the Court found that the federal government lacked good cause to bypass notice and comment.

This ruling will have significant implications for out-of-network providers across the country. The next step will be to see the federal government’s response to these provisions under the No Surprises Act being struck down by the Court. 

Just as important, the Court’s reasoning may apply to statutes passed by various states, including New Jersey, addressing out-of-network payments, including how the arbitration process is implemented by those state statutes. The arbitration process in the New Jersey Out-Of-Network Consumer Protection, Transparency, Cost Containment and Accountability Act (the “New Jersey Transparency Act”) is set forth in Section 10. Pursuant to Section 10 of the New Jersey Transparency Act, the arbitrator is required to select either the provider’s or insurer’s offer similar to the No Surprises Act. It should be noted, however, that regulations have yet to be drafted for the New Jersey Transparency Act.

For the specific provisions under the No Surprises Act that were struck, see below:

  • 45 C.F.R. § 149.510(a)(2)(viii); the second sentence of 45 C.F.R. § 149.510(c)(4)(ii)(A); the final sentence of 45 C.F.R. § 149.510(c)(4)(iii)(C); 45 C.F.R. § 149.510(c)(4)(iv); and 45 C.F.R. § 149.510(c)(4)(vi)(B);
  • 26 C.F.R. § 54.9816-8T(a)(2)(viii); the second sentence of 26 C.F.R. § 54.9816-8T(c)(4)(ii)(A); the final sentence of 26 C.F.R. § 54.9816- 8T(c)(4)(iii)(C); 26 C.F.R. § 54.9816-8T(c)(4)(iv); and 26 C.F.R. § 54.9816- 8T(c)(4)(vi)(B); and
  • 29 C.F.R. § 2590.716-8(a)(2)(viii); the second sentence of 29 C.F.R. § 2590.716-8(c)(4)(ii)(A); the final sentence of 29 C.F.R. § 2590.716- 35 8(c)(4)(iii)(C); 29 C.F.R. § 2590.716-8(c)(4)(iv); and 29 C.F.R. § 2590.716- 8(c)(4)(vi)(B).