On Tuesday, July 17, 2018, the United States Court of Appeals for the District of Columbia ended a challenge brought by hospitals and hospital associations to the nearly 28 percent reimbursement cuts for 340B hospitals under the Medicare program. The payment cuts were finalized in the calendar year (CY) 2018 Medicare Outpatient Prospective Payment System (OPPS) rule and took effect on January 1, 2018. Compounding the impact of the failure of the litigation for affected 340B hospitals, CMS has now proposed to extend the 340B hospital payment cuts to new locations as part of the proposed CY 2019 Medicare OPPS rule. If finalized, the new payment cuts would take effect on January 1, 2019.

The D.C. Circuit Court’s Opinion

The appellate court affirmed the December 2017 ruling by the United States District Court dismissing the case. The decision did not address whether HHS had authority in the OPPS to make the 340B reimbursement cuts (as plaintiffs had argued), but instead focused on whether the district court had subject matter jurisdiction to hear the plaintiffs’ challenge when the plaintiffs had not yet presented a claim for payment to the Department of Health and Human Services (HHS) for final decision.

To obtain judicial review of Medicare reimbursement disputes, section 205(g) of the Social Security Act (42 U.S.C. § 405(g)) requires that a claim be presented to the Secretary, and that a plaintiff exhaust administrative remedies, before having an opportunity to pursue a matter in federal court. At the time the action was brought, the 340B hospital rate cuts were not yet effective, and so no plaintiff had yet submitted (i.e., presented) a claim for reimbursement, and the district court dismissed the case on jurisdictional grounds. On appeal, the plaintiffs, including the American Hospital Association, America’s Essential Hospitals, and the Association of American Medical Colleges (the hospitals), argued that they had met the presentment requirement by submitting comments in notice and comment rulemaking in response to the proposed cut. Alternatively, the hospitals argued they had cured any defect in presentment because they made payment demands to HHS during the pendency of the appeal after the new payment cuts went into effect on January 1, 2018.

The court rejected the hospitals’ argument that comments made in notice-and-comment rulemaking could satisfy the presentment requirement. The court cited precedent finding that the presentment requirement generally prevents anticipatory legal challenges to Medicare rules and regulations. Although the hospitals submitted demands for payment to HHS while the case was on appeal from the district court’s dismissal, the court also found that these demands were too late to establish subject matter jurisdiction, which must be done at the district court level.

Finally, because it concluded that it lacked subject-matter jurisdiction to hear the case, the court could not consider the merits of the case. The court noted that it need not consider HHS’s contention that the Medicare statute forecloses judicial review even if the hospitals were able to satisfy the presentment and exhaustion requirements.

The hospitals have the option in this case of requesting review by the U.S. Supreme Court. They may also choose to pursue a new challenge by identifying a plaintiff that has presented a claim for reimbursement under the CY 2018 reduced reimbursement. Any such challenge would need to first proceed through CMS’ administrative process before review by a federal court could address the validity of CMS’ rulemaking.

CMS Proposes to Extend 340B Hospital Rate Cuts to Site-Neutral Hospital Outpatient Departments for 2019

In the recently released proposed CY 2019 OPPS rule, CMS proposes to expand last year’s 340B hospital rate cuts to also apply to those off-campus, non-excepted hospital outpatient departments (HOPDs) that are subject to Medicare’s site neutrality rules (site-neutral HOPDs). Currently, site-neutral HOPDs have their Medicare OPPS reimbursement reduced by 60%, to approximate payment rates under the Medicare physician fee schedule. However, these reductions are not applied to drugs that are separately payable under the OPPS. In addition, while last year’s (CY 2018) OPPS reduced reimbursement to 340B hospitals for separately payable drugs purchased under the 340B program, CMS did not apply the payment reductions to site-neutral HOPDs. Under current law, separately payable drugs dispensed at a site-neutral HOPD are reimbursed at ASP + 6%, which approximates the reimbursement available under the Medicare physician fee schedule.

The proposed CY 2019 OPPS rule would reduce reimbursement for separately payable drugs billed by site-neutral HOPDs to ASP – 22.5%. CMS defends this proposal by claiming it is necessary to prevent 340B hospitals from having a “perverse incentive” to move 340B drug-related services to site-neutral HOPDs where reimbursement for the separately payable drugs is better than at other HOPDs (reimbursement for other services is significantly lower). The result of the proposed change is to once again create equivalence between 340B hospital HOPDs that are and are not subject to the site neutrality rules. However, site-neutral HOPDs will now be reimbursed significantly less than a freestanding physician office for separately payable drugs purchased under the 340B program.

Reimbursement for 340B Hospitals of Drugs that are Separately Payable under the OPPS and Purchased under 340B

If finalized, CMS’ extension of the 340B hospital rate cuts will further depress reimbursement for 340B hospitals, and will hinder the creation of new, off-campus HOPDs. Comments on the proposed OPPS rule may be submitted until September 24, 2018.

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