Last week, the D.C. Circuit Court of Appeals (the “Court”) reinstated a rule cutting reimbursement rates for drugs purchased at a substantial discount under Section 340B of the Public Health Service Act (the “340B Program”) that had previously been ruled unenforceable by the District Court. In American Hospital Association v. Azar,[1] the Court held that the Secretary of the U.S. Department of Health and Human Services (the “Secretary”), acting through CMS, does have authority to reduce Outpatient Prospective Payment System (“OPPS”) reimbursement rates for 340B drugs by 28.5% for certain hospitals participating in the 340B Drug Pricing Program.
The ruling is a major setback for 340B Covered Entities. Still, there remains a chance that the hospital plaintiffs and the American Hospital Association prevail upon rehearing by the Court. Ultimately, we expect the plaintiffs to appeal or seek rehearing on the D.C. Circuit Court’s decision. However, even if plaintiffs prevail, another battle regarding remedies remains on the horizon.
Below we provide background on the OPPS rules under which CMS reduced reimbursement to 340B Covered Entities, a summary of the challenge to the rules in the D.C. District Court, an overview of the procedural posture of the case on appeal and the implications of the D.C. Circuit Court’s decision, an overview of CMS’s recently published 2021 OPPS proposed rule further reducing reimbursement to 340B Covered Entities, and some practical takeaways on what CMS’s actions could mean for the 340B Program.
The 340B Program and the 2018 and 2019 OPPS Final Rules
CMS sets reimbursement rates for specified covered outpatient drugs (“SCODs”) in the annual OPPS rules, based on either the average acquisition cost derived from hospital data or the average sales price (“ASP”) derived from manufacturer data. Since CMS had never surveyed hospitals for cost data, it always set reimbursement rates based on sales data provided confidentially by drug manufacturers. Since 2006, the reimbursement rate for SCODs has been set between ASP plus 4% and ASP plus 6%. The statute outlining the rate-setting methods additionally allows the Secretary to adjust the average price metric “as necessary.”
Hospitals participating in the 340B Program (“340B Hospitals”) are able to purchase SCODs from manufacturers at a significantly discounted rate compared to other purchasers. CMS notes that 340B Hospitals generate profits from these 340B drug purchases by receiving standard reimbursement rates that are not reflective of their discounted acquisition costs.
In the 2018 and 2019 OPPS Final Rules (“2018 and 2019 OPPS Rules”), CMS reduced the SCOD reimbursement rate for 340B Hospitals from ASP plus 6% to ASP minus 22.5% while keeping the rate paid to non-340B Hospitals at ASP plus 6%. CMS asserted that the cuts were necessary adjustments to the average price metric, as permitted by statute, that would save Medicare approximately $1.6 billion in reimbursement to 340B Hospitals in 2018 alone. Because the statute additionally requires that rate cuts be budget neutral, CMS used the 340B-related reimbursement savings to support overall OPPS reimbursement increases irrespective of a hospital’s tax exemption status.
D.C. District Court Strikes the Rules
The District Court found that CMS’s interpretation of the statute authorizing price adjustments was unreasonable and that CMS exceeded that authority when it “fundamentally rework[ed] the statutory scheme” by making significant rate adjustments with broad impact without supporting survey data. The District Court invalidated the 2018 and 2019 OPPS Rules and remanded the matter to allow CMS to design a remedy for the improper payment reductions. Because the rate reductions corresponded with other Part B rate increases, the remedy was not as simple as paying 340B Hospitals the 28.5% savings; that money would have to be clawed back from somewhere else. Before a remedy was devised, however, the Secretary appealed the decision and CMS issued the 2020 OPPS Proposed Rule, stating its intent to continue paying 340B Hospitals ASP minus 22.5% for most SCODs.
D.C. Circuit Court Upholds the Rules
In a 2-1 decision reversing the lower court’s ruling, the D.C. Circuit held that CMS in fact reasonably interpreted the Medicare statute as authorizing the rate reductions under a “general adjustment authority” with the purpose “to accurately reimburse hospitals for their acquisition costs.” The majority found that CMS’s adjustments were based on reasonable cost measures that were not foreclosed by the statute. The majority rejected the Plaintiffs’ argument that the statute does not authorize rate adjustments for 340B Hospitals alone under the ASP-based rate setting provision, but rather such rates must be uniform across all hospitals. The Court instead found that the statute “does not clearly preclude [CMS] from adjusting the SCOD rate in a focused manner to address problems with reimbursement rates applicable only to certain types of hospitals.” Therefore, the 2018 and 2019 OPPS Rules were valid.
Judge Pillard dissented, agreeing with the plaintiffs that targeted reimbursement rate adjustments can be applied to 340B Hospitals only when the rate is based on hospital acquisition cost data, and not when the rate is based on manufacturers’ ASP. The statute outlining the rate setting options provides that if acquisition cost data is the basis for the rate, then the rate “shall be equal . . . to the average acquisition cost for the drug for that year,” which “may vary by hospital group (as defined by the Secretary based on the volume of covered . . . services or other relevant characteristics)[.]” If manufacturers’ ASP is the basis for the rate, then the statute permits the rate to be “‘adjusted . . . as necessary,’ but… grants no authority to vary the reimbursement rates by hospital group.” Judge Pillard pointed out that prior to 2018, every “adjustment” to the ASP-based reimbursement rate was a nominal amount accounting for overhead costs and applied uniformly across hospitals. He framed the issue as “whether the agency may set and vary by hospital group SCOD reimbursement rates without collecting and considering… data… by invoking its authority… to adjust the average-sales-price-based reimbursement rate and, in effect, simply deem that to be a rate reflecting hospitals’ average acquisition cost.” To this, he would have answered no and invalidated the 2018 and 2019 OPPS Rules.
2021 OPPS Proposed Rule
This week CMS issued the 2021 OPPS Proposed Rule, which proposes to cut 340B drug rates even further in 2021 and subsequent years, to ASP minus 28.7%. CMS asserts that this deeper cut is based on the results of its first ever hospital acquisition cost survey, which it introduced in the 2020 OPPS Final Rule and discusses in the 2021 OPPS Proposed Rule. Alternatively, the rule proposes to maintain the current rate of ASP minus 22.5%, which was found reasonable by the D.C. Circuit Court’s decision.
The Hospital Acquisition Cost Survey for 340B Drugs compiles data from 340B Hospitals’ completion of either a Detailed Survey or a Quick Survey. Approximately 38% of survey recipients did not respond through either survey option and were designated as having an acquisition cost equal to the minimum average discount. Incorporating these data points with the survey responses, CMS concluded that the average discount rate for 340B drugs was ASP minus 34.7%. Because non-340B Hospitals are reimbursed at ASP plus 6%, CMS added 6% for a final 340B rate of ASP minus 28.7%.
As in prior years, rural sole community hospitals, children’s hospitals and PPS-exempt cancer hospitals are not subject to the 340B drug payment policy outlined in the 2021 OPPS Proposed Rule.
Practical Takeaways
- 340B Hospitals should prepare for continued reduction in payment for 340B drugs.
- Although the Plaintiffs still have time to seek rehearing en banc and to petition for Supreme Court review, any further review of the D.C. Circuit’s decision will be discretionary. En banc rehearing is disfavored and ordinarily will not be ordered unless it is “necessary to secure or maintain uniformity of the court’s decisions,” which would require citation to a conflicting decision from the same Circuit Court or the Supreme Court, or “the proceeding involves a question of exceptional importance.”
- Even if the Plaintiffs are successful on rehearing, CMS has hinted that its remedy for prior years’ reduced reimbursement may be to retroactively apply the rate that would have been applicable under the cost-based methodology, rather than the ASP-based methodology, as determined based on its recent hospital acquisition cost survey. The results of that survey—and CMS’s further reduction of the 340B reimbursement rates based thereon—strongly suggest that the “remedy” may not result in any additional compensation for 340B Hospitals. If the court deciding in favor of the hospitals does not retain jurisdiction but remands the matter to CMS, as the District Court did here, then any remedy, whether crafted through future rulemaking or adjudication by CMS, will be challengeable through the usual applicable administrative process.
We will continue to monitor developments in this area.
If you have any questions or would like additional information about this topic, please contact:
- Todd Nova at (414) 721-0464 or tnova@wp.hallrender.com;
- Sara MacCarthy at (414) 721-0478 or smaccarthy@wp.hallrender.com;
- Daniel Miller at (414) 721-0463 or dmiller@wp.hallrender.com;
- Elizabeth Elias at (317) 977-1468 or eelias@wp.hallrender.com;
- Heather Mogden at (414) 721-0457 or hmogden@wp.hallrender.com;
- Lindsey Croasdale at (414) 721-0443 or lcroasdale@wp.hallrender.com; or
- Your regular Hall Render attorney.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
