On December 27, 2018, the US District Court for the District of Columbia concluded in The American Hospital Association, et al v. Alex M. Azar II that the US Department of Health and Human Services (HHS) overstepped its statutory authority when it substantially reduced Medicare Part B reimbursement beginning in 2018 for drugs purchased through the 340B Drug Pricing Program. While granting the hospital plaintiffs’ request for a permanent injunction, the court stopped short of specifying a financial remedy, instead directing the parties to provide a supplemental briefing on the proper remedy within 30 days of its decision.

Background

In November 2017, the Centers for Medicare & Medicaid Services (CMS) published a final rule regarding the Medicare Part B outpatient prospective payment system (OPPS) for calendar year (CY) 2018. The rule dramatically lowered reimbursement for most separately payable outpatient drugs acquired through the 340B program. CMS had previously reimbursed these 340B drugs at average sales price (ASP) plus six percent. Under the new rule, the agency began paying ASP minus 22.5 percent for the same drugs. (The reimbursement cut did not apply to drugs with “pass-through” payment status.)

CMS stated that the new payment methodology would save an estimated $1.6 billion on OPPS-reimbursed drugs. However, CMS applied the reimbursement reduction in a budget-neutral manner, under which the savings were used to increase payment for OPPS non-drug items and services, including those furnished by non-340B hospitals.

Notably, the reimbursement reduction did not apply to all 340B hospitals. Critical access hospitals (CAHs) were unaffected because they are not paid under OPPS. In addition, the rule specifically exempted from the reimbursement cut hospitals with a “rural sole community hospital” designation, freestanding children’s hospitals and freestanding cancer hospitals. With the exception of CAHs, all other 340B hospitals—including those unaffected by the cut—were required to submit modifiers for 340B-acquired drugs paid under OPPS, including “pass-through” drugs.

Shortly after the rule was issued, hospital groups and individual hospitals filed a lawsuit challenging the lower reimbursement rate. Prior to the court decision, CMS issued its OPPS final rule for CY 2019. The new rule continued the payment reduction and extended the cut to additional hospital outpatient locations.

Decision and rationale

While acknowledging that the HHS secretary can make “adjustments” to the statutorily mandated payment formula of ASP plus six percent, the district court found that the secretary exceeded that authority by significantly reducing reimbursement for 340B drugs. The court concluded that “the Secretary fundamentally altered the statutory scheme established by Congress for determining . . . rates,” commenting that the payment cut was not “modest” and affected “potentially thousands of pharmaceutical products.”

Although the court granted the plaintiffs’ request for a permanent injunction, it stopped short of determining a financial remedy, expressing concern about its potentially disruptive effect on budget neutrality. The plaintiffs had requested that the court require HHS to apply the old payment methodology of ASP plus six percent for the remainder of 2018 and repay the difference between the new reimbursement formula and the old payment methodology. The court instead directed the parties to provide a supplemental briefing on the appropriate remedy within 30 days of its decision.

The plaintiffs also had asked the court to enjoin HHS from continuing the reimbursement reduction in the CY 2019 OPPS rule. The court declined, explaining that the plaintiffs’ complaint did not explicitly challenge the new rule and that the plaintiffs failed to show, as required by statute, that they had presented to the secretary a claim for payment under the 2019 rule.

Next steps

After providing a supplemental briefing on the proper remedy, the parties will have 14 days to submit responses, after which the court might decide on the appropriate remedy. It is unclear how the court, having called the situation a “quagmire that may be impossible to navigate,” will decide. Depending on the court’s decision, one or both parties may appeal, which would cause the case to stretch well into 2019 and perhaps beyond. Since the decision did not affect the rate reduction in the CY 2019 OPPS rule, it is possible that hospital groups will challenge that rule as well.

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We will continue to monitor and keep you informed of the progress of the case and other developments related to Medicare Part B reimbursement for 340B drugs. In the meantime, please reach out to any one of us with questions.

To sign up for 340B @ Dentons, please contact Erin Whittaker at erin.whittaker@dentons.com