Federal Court Invalidates CMS’ Reduction of Medicare Hospital Outpatient Payment Rates for 340B Drugs

On December 27, 2018, the Federal District Court for the District of Columbia enjoined the Centers for Medicare and Medicaid Services (CMS) from implementing a regulation setting reimbursement for hospital outpatient payment rates for 340B drugs at Average Sales Price (ASP) minus 22.5%.

A brief history: Section 340B of the Public Health Service Act requires a manufacturer of covered outpatient drugs, as a condition of having its drugs be eligible for federal payment under Medicaid and Medicare Part B, to enter into a Pharmaceutical Pricing Agreement with HHS. Under the agreement, the manufacturer is obligated to charge no more than a statutorily defined ceiling price to certain types of purchasers (called “Covered Entities”) designated in the statute, which include certain types of clinics that receive federal funding and certain types of hospitals. Congress’s stated rationale for the 340B Drug Discount Program was to maximize scarce Federal resources as much as possible, reaching more eligible patients, and providing care that is more comprehensive.

Under the Social Security Act, CMS must set reimbursement rates for certain separately payable drugs under the Medicare Part B hospital outpatient prospective payment system (OPPS). Since 2005, CMS has set reimbursement rates for all separately payable hospital outpatient drugs, including 340B drugs, based on average sales price (ASP) plus 6%. However, in 2017, CMS proposed to revise the reimbursement formula for 340B drugs. Concluding that hospital Covered Entities profited too much from reimbursement for 340B discounted drugs, CMS revised the payment amount for hospital outpatient separately payable 340B drugs to ASP minus 22.5%. The American Hospital Association (AHA) and various other hospital associations and non-profit hospitals submitted comments opposing this change in calculation methodology, arguing that CMS was not authorized to make the change. Nevertheless, CMS finalized the rule, asserting that it had the statutory authority under 42 U.S.C. 1395I(t)(14)(A)(iii)(II) to set the rate based on average price for the drug “as calculated and adjusted by the Secretary.”

Within days of the release of the final rule, a group of hospitals and health organizations—including the American Hospital Association, the Association of American Medical Colleges, and America’s Essential Hospitals—filed suit to stop the cuts. Since at the time of filing of that first complaint, the reduction in reimbursement was not yet effective, the case was dismissed. In 2018, shortly after the Court of Appeals upheld the district court’s dismissal, Plaintiffs refiled the case. By that time, the rule had become effective and Plaintiffs had presented reimbursement claims. Thus, procedural concerns leading to the 2017 dismissal had been resolved.

Plaintiffs’ core allegation was that CMS acted ultra vires (i.e., it lacked the authority) when it reduced the OPPS reimbursement rate for 340B drugs from ASP plus 6% to ASP minus 22.5%. In the 2017 rulemaking, CMS had based its action on 42 U.S.C. § 1395I(t)(14)(A)(iii)(II), which authorizes CMS to “calculate[] and adjust[]” the statutory benchmark rate of ASP plus 6% as “necessary.” CMS claimed that the statute does not impose any limits on its authority to adjust the rates, as long as they are related to ASP. The judge disagreed and concluded that the statute does not give CMS unbridled authority to change the calculation methodology. In fact, precedent established that the provision allowing CMS to “adjust” does not mean that it is authorized to make “basic and fundamental changes” to statutorily imposed rates.

Considering the magnitude of the reduction of almost 30% in reimbursement (from ASP plus 6% to ASP minus 22.5%) and the wide applicability (affecting potentially thousands of 340B drugs), the Court concluded that CMS “fundamentally altered the statutory scheme,” thereby exceeding its authority to “adjust[]” the reimbursement rate. The Court agreed that CMS has the authority to base reimbursement rates on the hospitals’ acquisition costs (here the 340B price). However, CMS is so authorized only if it considers hospital acquisition cost survey data, which CMS did not have. Under the statute, if CMS does not have such survey data, CMS must calculate the reimbursement rate based on ASP rather than on acquisition cost, and cannot fundamentally rework the statutory scheme through a purported “adjustment”.

Although the Court granted Plaintiffs’ motion for a permanent injunction, it did not yet vacate the 2018 rule. Among other relief, Plaintiffs sought a retroactive increase in payment rates for 340B drugs to ASP plus 6% for 2018. However, because of a requirement that all OPPS payment rates be budget neutral, increasing hospital reimbursement rates for 340B drugs retroactively for 2018 would also require retroactive offsets in payments for other items and services, creating a “quagmire that may be impossible to navigate . . . .” Accordingly, the Court decided to postpone a decision on an appropriate remedy, ordering the parties to provide supplemental briefing on this issue. Note that CMS had continued the ASP minus 22.5% reduction through 2019. 83 Fed. Reg. 58818, 58822 (Nov. 21, 2018). However, because Plaintiffs did not explicitly challenge the rule for CY 2019, and could not show that they had submitted a claim for payment under the 2019 rule as required for judicial review, the court declined to review the more recent rule. Presumably, an attempt by CMS to implement the rate reduction for 2019 would be challenged by Plaintiffs, with a similar result.