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Government Appeals 340B Payment Cuts Decision; Question of Relief Continues in District Court

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The U.S. government has appealed a federal district court decision issued in December 2018 that found 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 CMS in the 2018 Outpatient Prospective Payment System (OPPS) final rule that went into effect January 1, 2018.

Hospital associations and hospital co-plaintiffs challenged the legality of the payment cuts in a September 2018 lawsuit filed in U.S. District Court for the District of Columbia. Under the 2018 OPPS final rule, CMS 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 plaintiffs argued that the cuts exceeded the government's authority under the Medicare statute.

In December, the district court sided with the plaintiffs, granting their 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. (See Baker Donelson's analysis of the district court decision.)

The question of relief, however, has remained unanswered. The court ruled that the plaintiffs are entitled to relief but held off on deciding what relief to grant, ordering supplemental briefing on the appropriate remedy. In addition to both parties responding to the court's request for proposed remedies, the plaintiffs have also supplemented their complaint and requested relief for cuts under the 2019 payment rates.

Although HHS has asked the U.S. Circuit Court of Appeals for the District of Columbia to review the lower court's decision, the government filed a motion on March 5, 2019, asking the circuit court to hold the appeal in abeyance pending the district court’s entry of final judgment with regard to the remedy for hospitals.

Expanded Scope of Challenge to Include 2019 Claims

On February 8, 2019, the plaintiffs filed a motion to supplement their complaint, asking the court to declare that the payment reduction to 340B hospitals included in the 2019 OPPS rule is arbitrary and capricious and contrary to the law, as well as in excess of HHS's authority under the Medicare statute. Under the 2019 rates, Medicare continued the payment cut to 340B hospitals implemented in 2018 and extended it to 340B drugs administered in non-excepted, off-campus hospital outpatient departments subject to reduced site neutral payments, which were not subject to reduced rates in 2018. The plaintiffs subsequently filed a motion for a permanent injunction to stop the 2019 payment reduction.

As initially filed, the lawsuit addressed only 2018 claims. In its December 2018 decision, the district court noted it was precluded from reviewing payment under the 2019 rates and declined to impose injunctive relief regarding 2019 payment rates, given that hospitals had not filed claims under the 2019 rates at the time the initial lawsuit was filed. The plaintiffs highlighted in their motion to supplement their complaint that hospitals have now filed claims and received reduced reimbursement under the 2019 rates.

In response, the government reiterated to the court the same arguments made against the initial claims under the 2018 rates, noting, "Defendants recognize that the Court has rejected those arguments in the context of the 2018 OPPS Rule, but respectfully request that the Court reconsider its conclusion in the context of the 2019 OPPS Rule."

Proposed Remedies

Both parties have filed briefs outlining their proposals for how the court could provide relief to hospitals. The plaintiffs urged the court to order HHS to repay affected hospitals the difference between what Medicare paid for 340B drug claims in 2018 at the reduced rate of ASP minus 22.5 percent and the rate that Medicare would have paid under the statutory default rate of ASP plus six percent. The plaintiffs proposed that, for hospitals already paid for 2018 claims, HHS provide a supplemental payment in the amount of the payment reduction plus interest. For hospitals not yet paid for 2018 claims, HHS should pay the full amount, based on the statutory default rate.

The government reiterated its request that the court not vacate the 2018 OPPS rule and that the court remand the matter to HHS for determination of the appropriate remedy. In the event the court vacates the rule, the government asked the court to stay the order to provide time for the government to decide whether to appeal. The government also cited prior D.C. Circuit decisions allowing the agency to determine the appropriate remedy as a result of unlawful payment rates. The government noted a number of ways that it could provide relief, such as through a retrospective fix undoing 2018 claims that may cause operational difficulties, a prospective fix that would increase payment to 340B hospitals, or some other method determined by the HHS.

In addition, the government argues that vacating the 2018 OPPS rule would be disruptive because the Medicare statute's budget neutrality requirements would require recoupment of the increased payments for non-drug services that offset the payment reduction under the 2018 rates. The plaintiffs, on the other hand, raise questions as to whether budget neutrality requirements in the Medicare statute apply to the kind of "adjustment" HHS made to OPPS payments through the 340B cut, among other arguments why budget neutrality should not apply.

Similarly, the Federation of American Hospitals (FAH), representing for-profit hospitals that do not qualify for the 340B program, submitted an amicus brief to the court asking that, if the court provides hospitals relief, the court not direct the government to provide relief in a budget neutral manner. Further, the court should find that HHS lacks the authority to recoup the increased payments for non-drug services that all hospitals received. The FAH noted it was not expressing an opinion on the court's determination that HHS lacked the authority to reduce 340B payments.

The government also argues that the plaintiffs' request for an injunction is overly broad because they request repayment for all 340B hospitals. According to the government, the plaintiffs have not shown that they represent all 340B hospitals.

Appeal and Next Steps for Hospitals

The government submitted its notice of appeal to the D.C. Circuit on February 22, 2019, but days later filed an unopposed motion to hold the appeal in abeyance while the district court continues to consider a remedy and issue a final judgment. In explaining its request, the government notes that holding the appeal in abeyance would allow the appeals court to "resolve any appeal regarding the scope of the injunction along with the underlying lawfulness of the Secretary's action." Such action would also avoid duplicative briefing, according to the government.

The parties continue to await a response from the district court on the appropriate remedy and the issuance of a final judgment. Meanwhile, the 2019 payment reduction remains in place. As such, 340B hospitals should continue to bill Medicare as required under the 2019 OPPS final rule, including the policies dictating the use of modifiers to identify 340B-acquired drugs.

In addition, the government is arguing that relief be limited to plaintiff hospitals and not include 340B hospitals that are not represented by the plaintiffs, which include hospital associations in addition to individual 340B hospitals. It is unclear whether the court will agree. Nevertheless, hospitals should consider appealing claims for 340B drugs paid under Medicare's reduced rates to preserve a right to recovery and put themselves in the best position to benefit from any relief granted by the courts.

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

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