In a long-awaited ruling, on May 6, 2019, Judge Rudolph Contreras of the U.S. District Court for the District of Columbia declined to vacate the Secretary’s CYs 2018 and 2019 Outpatient Prospective Payment System (OPPS) Final Rules, which cut by nearly 30 percent the OPPS payment rates for drugs purchased under the 340B Drug Pricing Program.  In an earlier ruling in late 2018, Judge Contreras held that the Secretary’s rate cut was ultra vires because it violated a statutory command to set OPPS drug payment rates using either hospital acquisition cost data or the drug’s average sales price (ASP).  Given that ruling’s potentially drastic effect on the Medicare program, Judge Contreras had ordered supplemental briefing before awarding plaintiffs with any specific relief.  Am. Hosp. Ass’n v. Azar, 348 F. Supp. 3d 62, 86–87 (D.D.C. 2018), available here.  In his latest ruling, Judge Contreras declined to vacate the rule, which effectively would have required the Secretary to reimburse hospitals for claims that had been underpaid due to the rate cut.  Instead, Judge Contreras decided to give the Secretary the “first crack at crafting an appropriate remedy.”  The Court’s full opinion in Am. Hosp. Ass’n v. Azar, No. 18-2084(RC) (D.D.C. May 6, 2019) can be found here.  Further background on the case can be found here.

By way of background, the 340B Drug Discount Program allows covered entities—including certain qualifying hospitals—to purchase drugs for outpatients at discounted rates.  Some drugs that are provided as hospital outpatient department services are separately payable under the OPPS.  Before 2018, CMS typically set the OPPS reimbursement rate for such drugs at ASP plus 6 percent, which historically is higher than the discounted rates 340B hospitals paid for these drugs.  When the Secretary issued his final 2018 OPPS Final Rule, however, he markedly reduced the rates for 340B drugs from ASP plus 6 percent to ASP minus 22.5 percent to reflect the average acquisition costs for 340B drugs as identified by the HHS Office of Inspector General.  The Secretary’s rule reduced OPPS payment rates for these drugs by nearly 30 percent. 

Shortly after the promulgation of the 2018 OPPS Final Rule, the plaintiffs, comprised of several associations (including the American Hospital Association) and a handful of hospitals, challenged the Secretary’s 340B drug reimbursement rate reduction.  Initially, the plaintiffs’ lawsuit was dismissed because they had failed to present their legal challenge to the Secretary in the context of a concrete claim for payment.  See Am. Hosp. Ass’n v. Hargan, 289 F. Supp. 3d 45, 55 (D.D.C. 2017), aff’d, Am. Hosp. Ass’n v. Azar, 895 F.3d 822, 828 (D.C. Cir. 2018).  After remedying this defect, plaintiffs refiled their lawsuit once again challenging the CY 2018 OPPS rate cut.  On December 27, 2018, Judge Contreras granted the plaintiffs’ motion for summary judgement, ruling that the Secretary’s decision to set OPPS payment rates for separately payable drugs at ASP minus 22.5 percent was ultra vires and exceeded his authority under the OPPS statute.   Specifically, Judge Contreras ruled that Congress gave the Secretary a binary option when setting OPPS drug reimbursement rates: set rates based upon hospital acquisition costs collected pursuant to a survey conducted by the Secretary or set rates based on the drug’s ASP.  Am. Hosp. Ass’n v. Azar, 348 F. Supp. 3d 62, 82–83 (D.D.C. 2018).  Judge Contreras, at that time, required the parties to submit additional briefing on the appropriate remedy to correct the Secretary’s violation of law. 

In their additional briefing, plaintiffs sought injunctive relief and for the court to order the Secretary to pay as if the 340B rate reduction never took effect, i.e., to retroactively pay plaintiffs’ claims under the ASP plus 6 percent methodology.  The Secretary, conversely, requested the court to remand without vacatur both the 2018 OPPS Final Rule and the 2019 OPPS Final Rule (which plaintiffs had challenged in the interim).  Although the typical remedy in an APA case is vacatur of the agency’s unlawful rulemaking, in his May 9, 2019 final decision, Judge Contreras expressed concern with the potentially “highly disruptive” nature of vacatur.  Citing Allied-Signal, Inc. v. U.S. Nuclear Regulatory Commission, 988 F.2d 146, 150–51 (D.C. Cir. 1993), the court weighed the seriousness of the Secretary’s deficiencies against the “disruptive consequences of an interim change that may itself be changed.”  Despite noting that the Secretary’s deficiencies were “substantial,” the court held that the “factors weigh[ed], ever so slightly, against vacatur.”

Vacatur, the court noted, would have required the Secretary to retroactively reimburse plaintiffs for 340B drugs at ASP plus 6 percent.  Because Medicare outpatient rates are budget neutral, the “savings” the Secretary realized from the nearly 30 percent rate cut were used to incrementally raise payment rates for all other Medicare Part B products and services.  Budget neutrality arguably could require the Secretary to recoup payments made across providers, causing extensive administrative burdens and disruption.  Further, the court noted the likely possibility the Secretary may not be able to retroactively adjust 340B payments, at least not in a budget neutral manner.

In order to avoid the havoc that retroactive relief might bring, Judge Contreras concluded that vacating the 2018 and 2019 OPPS Final Rules “would do more harm than good, despite the fatal flaws in the Secretary’s 340B rate adjustments.”  Consequently, the court remanded the 2018 and 2019 OPPS Final Rules to the Secretary without vacatur.  The court’s ruling effectively gives the Secretary the power to fashion his own reasonable remedy to address his violation of the OPPS statute.  The parties must submit a status report regarding their progress in fashioning a remedy before August 5, 2019.

King & Spalding will continue to monitor American Hospital Association v. Azar to provide timely updates on the definitive resolution of this case.