Court of Appeals Reverses Hospitals’ Victory in 340B Drug Reimbursement Case

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On July 31, 2020, the U.S. Court of Appeals for the District of Columbia Circuit reversed a district court decision that had found unlawful Medicare’s nearly 30 percent rate cut for separately payable outpatient drugs purchased under the 340B program. In a 2-1 decision, the Court of Appeals applied the deferential Chevron doctrine to hold that CMS had reasonably interpreted the Medicare statute to grant it the authority to impose this rate cut on hospitals. Rather than the statutory rate for 340B drugs of Average Sales Price (ASP) plus six percent, the rule directs that hospitals will be paid ASP minus 22.5 percent, a rate cut that will cause hospitals to continue to lose billions of dollars each year in reimbursement.

As background, Congress set reimbursement for these “340B drugs” so as to “stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” H.R. Rep. No. 102-384(II), at 12 (1992); see also 82 Fed. Reg. 52362, 52493 & n. 18 (Nov. 13, 2017) (quoting House Report and noting that “[t]he statutory intent of the 340B Program is to maximize scarce Federal resources as much as possible, reaching more eligible patients”). By statute, CMS is directed to set payment rates for all such drugs using one of two alternative processes: (i) the Secretary may set the payment rate at the average hospital acquisition cost using “hospital acquisition cost survey data,” 42 U.S.C. § 1395l(t)(14)(A)(iii)(I) (subclause I) ; or (ii) if “hospital acquisition cost data are not available,” the Secretary may use the average sales price for the drug established by 42 U.S.C. § 1395w-3a and “as calculated and adjusted by the Secretary as necessary for purposes of this paragraph,” 42 U.S.C. § 1395l(t)(14)(A)(iii)(II) (subclause II). Prior to 2018, the Secretary paid for such drugs pursuant to the second option, and adjusted the rate as required by statute to ASP plus 6 percent. 42 U.S.C. § 1395w-3a(b)(1)(A)-(B); see also 77 Fed. Reg. 68210, 68387-89 (Nov. 15, 2012) (acknowledging that hospital acquisition data is not available and adding the 6 percent to account for overhead and administrative costs).

The 340B Program has come under criticism by those who have noted that qualifying hospitals are generally reimbursed by Medicare at a rate that exceeds their costs for purchasing 340B drugs. Hospitals contend, however, that these funds are critical in providing services to large numbers of low-income patients as Congress intended. Nonetheless, CMS implemented its 340B rate cut policy, adopted in the Calendar Year 2018 Outpatient Prospective Payment System (OPPS) Final Rule, to cut the rates for separately payable drugs purchased under the 340B program to ASP minus 22.5 percent. The rate cut was designed to “better align[]” to hospitals’ true acquisition costs for 340B drugs. 82 Fed. Reg. at 52501.

The lawsuit, brought by the American Hospital Association (AHA), other hospital associations and a handful of representative hospitals, was initially dismissed by the U.S. District Court for the District of Columbia because the plaintiffs had failed to present their claims to the Secretary in the context of a claim for payment, as required by the Medicare statute. Plaintiffs, after properly presenting their claims, filed a second lawsuit challenging the rate cut to 340B drugs—and succeeded in the district court. The district court held that CMS’s rate cut violated the formula prescribed in the Medicare statute for setting rates for certain outpatient drugs. The agency violated the statute, according to the district court, to use its adjustment authority to develop a third payment methodology altogether, which the ASP minus 22.5 percent formula effectively was.

In the majority opinion authored by Chief Judge Srinivasan, the court of appeals reversed the district court’s decision. It applied the Chevron doctrine, a two-step legal framework that often proves to be highly deferential to agencies. See Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984). Under Chevron, a court first determines whether the statute is clear and, if so, decides the issue on the plain meaning of the text. If the text is silent or ambiguous, the court then determines whether the agency’s interpretation is reasonable. Here, the Court concluded that Congress did not unambiguously bar CMS from using subclause II to align reimbursement rates with acquisition costs. The Court then, as a matter of course, found that CMS’s interpretation of its authority to cut reimbursement by nearly 30 percent using subclause II was reasonable.

What this means as a practical matter is that affected hospitals are poised to continue to lose billions of dollars in reimbursements under the ASP minus 22.5 percent formula. In a dissenting opinion, Judge Pillard noted that the net effect of the 340B rate cut is to “redistribute funds from financially strapped, public and nonprofit safety-net hospitals serving vulnerable populations—including patients without any insurance at all—to facilities and individuals who are relatively better off. If that is a result that Congress intended to authorize, it remains free to say so. But . . . the statute as it is written does not permit the challenged rate reductions.”

A copy of the Court of Appeals’ decision can be found here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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