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Federal Appeals Court Upholds Payment Reduction to 340B Hospitals

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On July 31, 2020, the D.C. Circuit Court of Appeals issued a decision reversing a lower court decision and upholding Medicare payment cuts to certain hospitals participating in the 340B drug pricing program that have been in place since 2018. The court reversed a December 2018 federal district court ruling that found payment cuts to 340B hospitals under the Outpatient Prospective Payment System (OPPS) to have exceeded the agency's authority.

Just days later, on August 4, 2020, CMS issued a proposed OPPS payment rule for 2021, which included a further reduction in payment rates to 340B hospitals and, in light of the court upholding the current payment policy, an alternative policy to continue paying 340B hospitals at the current rates.

See Baker Donelson's analysis of the 340B hospital payment proposals included in the 2021 OPPS Proposed Rule here.

Background on 340B Litigation

At issue are payment cuts of nearly 30 percent for Medicare Part B drugs billed by 340B hospitals that were first implemented in 2018. Hospital associations and hospital co-plaintiffs challenged the legality of the cuts in a September 2018 lawsuit filed in the U.S. District Court for the District of Columbia. Under the 2018 OPPS final rule, CMS reduced reimbursement to certain 340B hospitals for separately payable Part B drugs without pass-through status from average sales price (ASP) plus six percent, down to ASP minus 22.5 percent. The plaintiffs argued that the cuts exceeded the government's authority under the Medicare statute.

The district court sided with the plaintiffs in December 2018, finding 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.

Medicare continued the 340B payment cuts under the 2019 OPPS final rule and extended the cuts to 340B drugs administered in non-excepted, off-campus hospital outpatient departments subject to reduced site-neutral payments: sites not previously subject to reduced rates in the 2018 rule. The plaintiffs also asked the district court to declare the 2019 payment reduction unlawful and, in May 2019, the district court ruled in favor of the hospitals for a second time.

HHS appealed the lower court's decision to the D.C. Circuit Court of Appeals on July 15, 2019, and the Court heard oral arguments on November 8, 2019.

Meanwhile, HHS continued the payment cuts under the 2020 OPPS final rule, and Medicare has continued to pay 340B hospitals at reduced payment rates throughout the pending litigation.

HHS's Authority to Implement 340B Payment Cuts

The Circuit Court reviewed HHS's payment policy under the Chevron standard. The court described the Chevron standard as asking whether the statute directly speaks to the question at issue and, if it does not, then the court should defer to an agency's reasonable interpretation of the statute. Here, the court found that the Medicare statute does not foreclose HHS's interpretation and that the payment cut was reasonable. Therefore, the court deferred to the agency’s position and upheld the payment cuts.

The Medicare statute provides HHS with two options for setting reimbursement to hospitals for separately payable drugs: 1) payment rates based on acquisition costs, if survey data is available, or 2) if survey data is not available, payment rates based on ASP. The District Court found the payment cuts unlawful because 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 District Court found that 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 was not available to HHS.

The Circuit Court disagreed, finding that HHS could justify an ASP-based payment rate that was adjusted downward to approximate acquisition costs because the statute allows HHS to adjust ASP-based payments "as necessary" for the purposes of the statute. The court agreed with the government's position that the overall purpose of the statute was to pay for drugs based on their acquisition costs. Therefore, the statute gave HHS the authority to reduce ASP-based payments to approximate 340B acquisition costs.

The court rejected the hospitals' argument that the payment reduction was so large that it went beyond the kind of "adjustment" allowed under the statute. The court also rejected claims that the statute does not allow ASP-based payments to vary by hospital groups and that the statute requires HHS to apply the same ASP-based payment rate to 340B and non-340B hospitals.

Implications for Hospitals and Next Steps

The court's decision upholding Medicare's current payment policy paved the way for CMS to propose continuing the current payment reduction next year. CMS also proposed a deeper payment cut based on survey data collected from hospitals earlier this year that relies on a different statutory authority than the authority at issue in the litigation. CMS is soliciting comments on both proposals, and could finalize either payment policy for 2021. See Baker Donelson's analysis of the 340B hospital payment proposals included in the 2021 OPPS Proposed Rule here.

In the meantime, the plaintiffs have the option to either request a hearing en banc before the entire panel of judges in the D.C. Circuit or request review by the U.S. Supreme Court. Outside of the legal process, Congress could take action to reverse the payment cuts. As hospitals consider ways to challenge the payment reductions, the current payment policy remains in effect for the remainder of 2020, including modifier requirements that require 340B hospitals to append modifiers to 340B drugs claims when billing Medicare Part B.

Baker Donelson will continue to monitor and provide updates regarding the litigation challenging 340B hospital payment cuts and OPPS rulemaking. Our attorneys and policy advisors are also available to assist clients with the drafting of comments in response to the 2021 OPPS proposed rule.

For further information, please contact Jeff Davis or any member of Baker Donelson's Reimbursement Team.

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