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Court Rules HHS 340B Payment Cuts Unlawful; HHS Seeks Stay in Proceedings

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In an opinion issued December 27, 2018, a Federal District Court ruled that the Department of Health & Human Services (HHS) exceeded its authority by reducing Part B drug reimbursement to certain hospitals in the 340B drug pricing program by nearly 30 percent. At issue were payment cuts implemented by the Centers for Medicare and Medicaid Services (CMS) in the 2018 Outpatient Prospective Payment System (OPPS) final rule that went into effect January 1, 2018.

The Court sided with the hospital association and hospital co-plaintiffs challenging the legality of the payment cuts, granting the plaintiffs' motion for a permanent injunction on the 2018 cuts. The Court found that, although HHS has the authority to implement payment reductions in certain cases, the Medicare statute does not provide HHS with the authority to implement the payment cuts to 340B hospitals included in the 2018 OPPS final rule. The Court ruled that the plaintiffs are entitled to relief but held off on deciding what relief to grant, ordering supplemental briefing within 30 days on what remedy to provide. In the meantime, HHS has sought a stay in the proceedings due to the government shutdown. The plaintiffs have opposed the stay.

CMS Authority to Reduce 340B Hospital Payments

The payment reduction in question reduced by nearly 30 percent reimbursement for certain 340B hospitals for separately payable Part B drugs without pass-through status: from average sales price (ASP) plus six percent, to ASP minus 22.5 percent. The payment cut applied to 340B hospitals that are disproportionate share (DSH) hospitals, rural referral centers (RRCs), and non-rural sole community hospitals (SCHs). Children's and cancer hospitals and rural SCHs were exempted from the payment cut, and the payment rules did not apply to critical access hospitals and Maryland hospitals, as they are not paid under the OPPS.

The 2018 OPPS final rule also required 340B hospitals paid under the OPPS, including those exempted from the payment reduction, to use modifiers when billing Medicare to identify 340B-acquired drugs.

The plaintiffs argued, and the Court agreed, that the Medicare statute did not grant HHS the authority to reduce payment to 340B hospitals in this manner. The agency argued that its authority under the statute to "adjust" payments allowed for the 340B payment reduction. The Court found, however, that the nearly 30 percent payment reduction went beyond a mere payment adjustment. Moreover, HHS intended for the payment reduction to more closely align 340B hospital payments with the acquisition cost of 340B drugs, but the statutory provision HHS relied on for its authority requires payment to be based on a drug's ASP, not acquisition cost. The statute allows HHS to pay for drugs based on their acquisition cost, but only if the agency is relying on acquisition cost survey data, which is not currently available to HHS.

History of Hospitals' Legal Challenges

On November 13, 2017, the hospital association and hospital co-plaintiffs filed a lawsuit in the U.S. District Court for the District of Columbia, asking the court to grant a preliminary injunction to stop the cuts from going into effect, asserting that HHS did not have the authority to reduce payments in this manner. The Court dismissed the challenge on procedural grounds, finding that the hospitals failed to present a ripe claim for reimbursement, as Medicare had not yet paid the hospital plaintiffs at the reduced rates.

On January 9, 2018, the plaintiffs appealed to the U.S. Court of Appeals for the D.C. Circuit, arguing that the District Court erred in dismissing the case as premature. The American Hospital Association, et. al., v. Hargan, Civ. Act. No. 17-2447 (RC) (D.D.C. 2017) (notice of appeal). Oral arguments were held on May 4, 2018. The D.C. Circuit dismissed the appeal on July 17, 2018, upholding the District Court's dismissal and finding that the plaintiffs did not present a claim for relief given that the payment cuts were not yet in effect when the initial lawsuit was filed.

The appeals court noted it did not consider the merits, however, as to whether CMS has the authority to issue the payment cuts, paving the way for a new lawsuit to consider the merits after the payment cuts were in place. The plaintiffs filed a new lawsuit in District Court on September 5, 2018, which the Court has now ruled on.

Hospital Implications and Next Steps

The Court will now consider what relief to provide to the plaintiffs, with supplemental briefing on the issue of what remedy to provide due within 30 days, by January 26, 2019. HHS has not indicated whether it plans to appeal the decision.

The defendants filed a motion to stay proceedings in the case on January 6, 2019, in light of the government shutdown, asking the Court to pause the lawsuit until Congress restores appropriations to the Department of Justice (DOJ). The plaintiffs filed a motion opposing the stay on January 7, 2019, noting DOJ can continue to litigate without appropriations and that HHS attorneys are not affected by the shutdown. The plaintiffs also urged the Court to rule "expeditiously" on a remedy for 2018 claims, before Medicare pays 2019 claims, to avoid disruption.

In their initial complaint, the plaintiffs asked the Court to vacate the rule and require that HHS repay 340B hospitals the difference between the 2018 rates and the rates that Medicare would have paid if not for the cuts. However, the Court recognized the complexity of Medicare payments and the "havoc" that could ensue if it granted the plaintiffs' request. HHS implemented the cuts in a budget neutral manner, offsetting the payment reduction for drugs with increased payments for non-drug services. The Court noted that the retroactive payments sought by the plaintiffs would presumably require similar offsets within the OPPS, calling the situation a "quagmire that may be impossible to navigate."

While the Court considers the question of the proper remedy, the 2018 payment reduction remains in place. Moreover, although HHS continued the payment reduction in 2019 as part of CMS's 2019 OPPS final rule and extended the cuts to additional hospital outpatient locations, the Court noted it was precluded from reviewing payment under the 2019 final rule and declined to impose injunctive relief regarding 2019 payment rates. As such, 340B hospitals should continue to bill Medicare as required under the 2019 OPPS final rule, including the policies dictating use of modifiers to identify 340B-acquired drugs.

Baker Donelson will continue to monitor the Court's actions and will provide updates on the relief the Court ultimately grants. For further information, please contact Jeff Davis, Tracy Weir, or any member of Baker Donelson's Reimbursement Team.

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