United States: District Court Strikes Down 340B Hospital Outpatient Payment Cuts

Last Updated: January 8 2019
Article by Erik L. Schulwolf

Happy New Year! While healthcare developments have been relatively slow lately due the ongoing partial Federal shutdown, an important story did arise over the most recent Holidays. We previously wrote about a lawsuit filed in November 2017 by a group of hospital trade associations against the Department of Health and Human Services (HHS) opposing a major change in Medicare reimbursement policy when 340B hospitals purchase drugs under the 340B program for use in the hospital outpatient setting.

On December 27, 2018, in American Hospital Association, et. al. v. Azar (Civil Action #18-2084) the U.S. District Court for the District of Columbia issued a permanent injunction to the Centers' for Medicare & Medicaid Services' (CMS') payment reductions in the CY 2018 Hospital Outpatient Prospective Payment System (OPPS) Final Rule for separately payable drugs acquired through the 340B program. The agency had reduced payment rates for these drugs from Average Sales Price (ASP) plus 6% to ASP minus 22.5%. The Court held that this cut exceeded CMS' authority to adjust reimbursement rates for these drugs under section 1833(t)(14)(A)(iii) of the Social Security Act.

Importantly, the Court declined to vacate the 2018 final rule and award payment to the members of the American Hospital Association (AHA) and its co-plaintiffs equal to the payments they would have received in 2018 had the cut not been in effect. Instead, the Court ordered supplemental briefing on the appropriate remedy. The Court also declined to enjoin the payment reductions scheduled to go into effect on January 1, 2019. Moreover, the Court did not address the policy that CMS adopted in the CY 2019 OPPS Final Rule that subjects excepted outpatient departments (i.e., so-called "section 603" hospital outpatient departments) to the same payment reductions, as that policy was not before the Court. CMS is likely to appeal the ruling to the United States Court of Appeals for the D.C. Circuit.

CY 2018 OPPS Final Rule and Lawsuit

In the CY 2018 OPPS Final Rule, CMS reduced reimbursement rates for specified covered outpatient drugs (SCODs) and other separately payable 340B drugs from ASP plus 6% to ASP minus 22.5%. CMS' objectives in doing so were to reduce the "profit" margin between acquisition cost and reimbursement rate for 340B drugs, mitigate the accompanying incentives for overutilization, and reduce cost sharing for beneficiaries. Importantly, and likely crucial to the lack of a remedy in the decision, CMS did not use the savings from the policy as a budget saver. Rather, the agency used the savings to increase payment rates across the OPPS system.

Under section 1833(t)(14)(A)(iii)(I) CMS is required to set payment rates based on a hospital acquisition cost survey data of the average acquisition cost for SCODs. However, section 1833(t)(14)(A)(iii)(II) states that "if hospital acquisition cost data are not available," the drug's payment amount is set at "the average price for the drug in the year established under section 1842(o), section 1847A, or section 1847B, as the case may be, as calculated and adjusted by the Secretary as necessary for purposes of this paragraph." Although section 1833(t)(14)(A)(iii)(II) refers to the ASP plus 6% rate at Section 1847A of the Act as the payment rate in the absence of survey data, the agency interpreted its adjustment authority under the provision to allow it "to apply a downward adjustment that is necessary to better reflect acquisition costs of 340B drugs." The payment reductions took effect January 1, 2018.

In late 2017, the American Hospital Association and other hospital associations along with individual 340B hospitals sued, challenging the CY 2018 OPPS Final Rule's 340B provisions under the Administrative Procedure Act (APA). The Court dismissed the action due to an absence of concrete reimbursable claims at the time the lawsuit was filed. Once they had claims from 2018, the plaintiffs refiled. At this point, CMS moved to dismiss on jurisdictional and merits grounds.

District Court Holds that 340B Cuts Were Ultra Vires

In a December 27 decision, Judge Rudolph Contreras struck down the agency's 340B cuts on the grounds that they exceed CMS' statutory authority under the Social Security Act. After dismissing CMS' jurisdictional arguments, the Court first addressed the question of whether CMS' adjustment authority under section 1833(t)(14)(A)(iii)(II) is plenary. Relying on the DC Circuit's decision in Amgen, Inc. v. Smith, 357 F.3d 103 (D.C. Cir. 2004), which held that there are limits on CMS' authority under section 1833(t)(2)(E) to make "other adjustments as determined to be necessary to ensure equitable payments" under OPPS, the Court concluded that the agency's section 1833(t)(14)(A)(iii) authority was similarly limited. As in Amgen, the Court held that the statute setting payment rates for SCODs does not allow CMS to make "'basic and fundamental changes' under the purported auspices of making mere 'adjustments' to the rates statutorily imposed by that subsection."

The Court next addressed whether reducing the 340B drug reimbursement rate from ASP plus 6% to ASP minus 22.5% was within CMS' limited adjustment authority under section 1833(t)(14)(A)(iii)(II). The Court noted that in Amgen and in other cases, rate adjustments applicable to a single drug and adjustments of 0.2% and 2.9% had been found to be within CMS' adjustment authority. Judge Contreras concluded, however, that the 340B cuts were different, affecting "potentially thousands of pharmaceutical products found in the 340B Program," and "imposing a nearly 30% reduction from the formula that Congress expressly set as the standard."1 The Court held that "[w]hen viewed together, the rate reduction's magnitude and its wide applicability inexorably lead to the conclusion that the Secretary fundamentally altered the statutory scheme established by Congress for determining SCOD reimbursement rates, thereby exceeding the Secretary's authority to 'adjust[]' SCOD rates under § (t)(14)(A)(iii)(II)."

The Court disagreed with CMS' argument that because section 1833(t)(14)(A)(iii)(I) "itself identifies 'acquisition cost[s]' as a valid reference point for drug payments," it must be within CMS' authority to adjust 340B reimbursement rates in pursuance of that goal. The Court noted that the authorization to set rates based on average acquisition cost is predicated on the agency conducting an acquisition cost survey. The Court concluded that CMS "cannot fundamentally rework the statutory scheme—by applying a different methodology than the provision requires—to achieve under subsection (II) what he could not do under subsection (I) for lack of adequate data."

Remedy Not Determined

Importantly, despite the hospitals' victory on the merits, the Court declined to vacate the CY 2018 OPPS Final Rule and require CMS to apply the ASP plus 6% methodology to 340B payments. The Court expressed concern that such a remedy is "likely to be highly disruptive" in light of budget neutrality requirements which would require offsetting reductions to other APCs, and ordered supplemental briefing on the issue of remedy, to be completed in mid-February.

Similarly, in a footnote, the Court declined to enjoin the ASP minus 22.5% payment rate in calendar year 2019 because the plaintiffs' complaint "does not explicitly challenge" the CY 2019 rule and that plaintiffs failed to show that they presented CMS with a "concrete claim for reimbursement under the 2019 rule." As such, CMS is not at this point required to revert back to the ASP plus 6% methodology for CY 2019. However, in 2019, hospitals are likely to again seek an injunction based on the Court's holding on the merits, arguing that it presents the same issues.


1 Of interest is that Judge Contreras is the same judge who, several years earlier, ruled in favor of PhRMA and against HHS in another 340B case involving the availability of 340B pricing for orphan drugs acquired by covered entities added by the ACA to the 340B program. There, as here, Judge Contreras invalidated an agency policy (in that case, the Health Resources and Services Agency, or HRSA) as beyond the scope of its statutory authority.

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