District Court Grants Government’s Motion to Dismiss Legal Challenge to Medicare Rate Cut for 340B Discounted Drugs

by King & Spalding
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On December 29, 2017, the United States District Court for the District of Columbia granted the government’s motion to dismiss a pre-implementation challenge to CMS’s policy to cut the Medicare reimbursement rate for separately payable outpatient drugs by nearly 30 percent. The legal challenge was brought by the American Hospital Association, the Association of American Medical Colleges, America’s Essential Hospitals as well as three public and not-for-profit hospitals. The District Court found that it lacked subject matter jurisdiction to hear the plaintiffs’ challenge because plaintiffs had failed to present their claims through the administrative review process as required by 42 U.S.C. § 405(g).

Background: The 340B Drug Pricing Program

Since 1992, the 340B Program allows eligible hospitals and certain other healthcare providers, otherwise referred to as “covered entities,” to purchase covered outpatient drugs at discounted rates from pharmaceutical manufacturers. The discount formula is set forth in statute, but generally equates to a large reduction in the average manufacturer price. Although only covered outpatient drugs are eligible for discount purchasing, 340B drugs can be provided to any outpatient regardless of whether the patient is covered by insurance. This feature of the Program means that, in some cases, insurers may reimburse covered entities at rates that exceed the 340B discounted pricing. Until 2018, for example, the Medicare program reimbursed hospitals for separately payable outpatient drugs at a rate equal to the average sales price (ASP) of the drug plus a fixed percentage (for example, ASP + 6 percent). Covered entities, which include disproportionate share hospitals, are expected to use these savings to expand services to low-income individuals and other vulnerable populations.

The 2018 Outpatient Prospective Payment Rule

On July 13, 2017, CMS issued the Outpatient Prospective Payments System (OPPS) proposed rule which included a proposal to reduce the reimbursement rate for separately payable outpatient drugs purchased through the 340B Program to ASP minus 22.5 percent, which would cut the payment rate for these drugs by nearly 30 percent. CMS based its decision, in part, on a recent MedPAC study which concluded that 340B hospitals received an average discount of 22.5 percent of the average sales price of drugs. The low acquisition cost combined with high Medicare reimbursement rate might encourage unnecessary utilization of certain 340B drugs, according to CMS. CMS proposed to cut the OPPS reimbursement rate for separately payable drugs to ASP minus 22.5 percent which, CMS estimated, would reduce Medicare payments for these drugs by approximately $900 million. Plaintiffs submitted public comments to the proposed rule, arguing among other things that CMS was required to set the reimbursement rate for separately payable outpatient drugs to either the average hospital acquisition costs, as determined by a survey of hospital acquisition data, or the average sales price of the drug. CMS did not, according to these comments, have the authority to adjust the ASP methodology so drastically without actual hospital survey data. Plaintiffs also noted that the 30-percent reduction in reimbursement would significantly hinder hospitals’ abilities to provide necessary services to vulnerable patients. Despite this opposition, CMS asserted it had broad discretion to adjust 340B Program payment rates and finalized the originally proposed payment scheme on November 13, 2017.

The Suit Against CMS

Soon after CMS published its final rule, plaintiffs sued CMS, challenging the agency’s decision to set the Medicare payment rate for separately payable outpatient drugs at ASP minus 22.5 percent. Plaintiffs also moved for a preliminary injunction to enjoin CMS from implementing the nearly 30-percent rate cut on January 1, 2018, arguing that the hospitals would be irreparably harmed by these reimbursement changes. The government opposed the request for a preliminary injunction and also moved to dismiss, claiming that the District Court did not have subject matter jurisdiction to hear the plaintiffs’ claims. The District Court heard oral argument from both parties on December 21, 2017, and issued its decision on December 29, 2017.

Court Grants Government’s Motion to Dismiss the Motion for Preliminary Injunction as Moot

The Social Security Act prohibits Federal courts from exercising jurisdiction over a claim arising under the Medicare statute unless the Secretary of the Department of Health and Human Services has issued a final decision on the claim following a hearing. 42 U.S.C. § 405(g). Courts have generally interpreted this statutory provision as requiring parties who wish to challenge a final decision of the Secretary to first present their claims to the agency and channel their challenge through an administrative review or appeal process. See Shalala v. Ill. Council on Long Term Care, Inc., 529 U.S. 1 (2000). Only once they have exhausted these administrative remedies and received a final decision of the Secretary can plaintiffs bring their claims to Federal courts.

The District Court concluded that it lacked subject matter jurisdiction under 42 U.S.C. § 405(g) because the plaintiffs had not sought administrative resolution of their claims before proceeding to Federal court. The District Court acknowledged that, in some circumstances, the requirement to exhaust administrative remedies can be waived, but the Court held that the requirement to first present one’s claims to the Secretary cannot. Because plaintiffs had not presented their claims to the Secretary prior to filing suit, the Court concluded it was without jurisdiction.

In reaching this decision, the Court rejected the plaintiffs’ argument that they presented their claims to the Secretary in the comments they filed in responded to the proposed OPPS rule. The District Court concluded that the comments submitted during rulemaking were not sufficiently particularized, and the plaintiffs could only present a challenge to the Secretary’s rate reduction by submitting a claim for reimbursement seeking a higher payment for a covered outpatient drug. Plaintiffs did not, and could not, do this, of course, because the lower reimbursement rates had not yet gone into effect.

Notably, the District Court did not rule on either the merits of the plaintiffs’ claims against the CMS outpatient drug rate cut or the plaintiffs’ request for a preliminary injunction. Thus, the plaintiffs in this lawsuit or any other hospital that is affected by the rate cut could presumably move forward with another legal challenge after presenting their claims to the Secretary. There is no word yet as to whether the plaintiffs in this case will appeal the District Court’s ruling.

The Memorandum Opinion is available here.

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