D.C. Circuit Reverses Lower Court, Clearing the Way for CMS Cuts in Drug Payment to 340B Hospitals

In December 2018, we reported on a decision of the Federal District Court for the District of Columbia enjoining CMS from implementing a 28.5% cut in Medicare Part B drug payments to hospitals that purchase drugs under the 340B Drug Discount Program.  On Friday, July 31, the D.C. Circuit reversed that decision.  Both courts applied the Chevron analysis for evaluating the lawfulness of an agency’s interpretation of the statute it administers, but they came to opposite conclusions.  Whereas the lower court had held that the extent of the cuts exceeded CMS’s authority under 42 U.S.C. § 1395l(t)(14)(A)(iii)(II) (“Clause II”) to “adjust” average prices in setting payment rates, the D.C. Circuit concluded that CMS’s interpretation of Clause (II) was not directly foreclosed by the statute and was therefore entitled to deference if reasonable.  The court found that CMS’s interpretation was reasonable, since there was no limit on “adjustments” that may be made under Clause (II), CMS adopted the cuts pursuant to notice and comment rulemaking, and the hospitals did not dispute that the 28.5% reduction (from average sales price (ASP) plus 6% to ASP minus 22.5%) would bring payment rates in line with actual drug acquisition costs under the 340B program.  The court rejected the hospitals’ argument that, under Clause (II), CMS could make only minor adjustments for overhead costs, and could not target 340B hospitals for cuts but not other hospitals.  It is possible that the hospitals will request reconsideration or reconsideration en banc, which must be done within 45 days.

This decision comes at a time when CMS is expected very soon to issue its proposed regulation on the Part B hospital outpatient prospective payment system (“HOPPS”) for 2021, which raises speculation about what action CMS will now take regarding hospital payment for 340B drugs.  CMS had issued the 28.5% cuts in 2018 and 2019, but the 2018 cuts were enjoined by the lower court decision in December 2018, and that court extended its injunction to the 2019 cuts in an opinion issued in May 2019.  Despite the lower court decision, CMS doubled down and maintained the cuts in the 2020 HOPPS rule while the government pursued its appeal.  CMS explained in the preamble to that rule that the lower court decision prohibited CMS from implementing the cuts as an “adjustment” to average prices under Clause II, but CMS was still permitted to reduce rates based on acquisition costs obtained through survey data under 42 U.S.C. 1395l(t)(14)(A)(iii)(I) (“Clause I”).  Accordingly, CMS explained that, if the government lost on appeal, CMS would either use hospital survey data to estimate acquisition costs under Clause I, or rely on solicited public comments to fashion a different remedy for the rates found unlawful under Clause II.  See 84 Fed. Reg. 61142, 61322 (Nov. 12, 2019).  In the meantime, hedging its bets, CMS conducted a survey of hospital acquisition costs for 340B drugs in April-May 2020 with an eye toward a Clause I rate setting.

The D.C. Circuit’s decision now opens two options for CMS: (1) the Clause II option of continuing to implement the 28.5% cuts for 2021 and subsequent years; or (2) the Clause I option of basing payment rates for 340B drugs on the new survey data on drug acquisition costs, which could result in even larger cuts.  A third possibility depends on the November election.  A newly elected Biden Administration could order the withdrawal of the payment reductions so as to avoid further financial stress on 340B safety net hospitals during the COVID 19 pandemic.  We will update our readers in the near future when CMS issues its proposed HOPPS rule for 2021.