Baker Ober Health Law

The D.C. Circuit Court of Appeals has scheduled oral arguments for November 8, 2019 in the ongoing lawsuit challenging Medicare payment cuts to hospitals in the 340B drug pricing program. The court is considering an appeal by the Department of Health and Human Services (HHS) of a December 2018 federal district court ruling that found payment cuts to 340B hospitals under the Outpatient Prospective Payment System (OPPS) to have exceeded the agency's authority.

Meanwhile, HHS indicated plans to continue the payment cuts in the 2020 OPPS proposed rule published in August. HHS acknowledged the pending litigation and is soliciting feedback on a potential remedy for hospitals if the court rules against the government on appeal and refunds are owed to hospitals. HHS also asked for feedback on a potential alternative payment rate for 340B drugs in future years that would amount to a smaller cut than the current payment rate.

Background on 340B Litigation

At issue are payment cuts of nearly 30 percent for Medicare Part B drugs billed by 340B hospitals that were first implemented in 2018. Hospital associations and hospital co-plaintiffs challenged the legality of the 2018 payment cuts in a September 2018 lawsuit filed in the U.S. District Court for the District of Columbia. Under the 2018 OPPS final rule, CMS reduced reimbursement for certain 340B hospitals by nearly 30 percent for separately payable Part B drugs without pass-through status – adjusting payment rates from average sales price (ASP) plus six percent, down to ASP minus 22.5 percent. The plaintiffs argued that the cuts exceeded the government's authority under the Medicare statute.

The district court sided with the plaintiffs in December 2018, finding 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.

Medicare continued the 340B payment cuts under the 2019 OPPS final rule and extended the cuts to 340B drugs administered in non-excepted, off-campus hospital outpatient departments subject to reduced site-neutral payments: sites not previously subject to reduced rates in the 2018 rule. The plaintiffs asked the district court to also declare the 2019 payment reduction unlawful and, in May, the district court ruled in favor of the hospitals for a second time.

HHS appealed the lower court's decision to the D.C. Circuit Court of Appeals on July 15, 2019.

HHS's Authority to Implement 340B Payment Cuts

In its opening brief, filed on September 3, 2019, the government argued that the Medicare statute precludes review of the payment cut, but, if it is reviewable, the district court erred in finding HHS exceeded its authority. The district court found that the nearly 30 percent reduction exceeded HHS's authority under the Medicare statute to "adjust" payments. HHS argues, however, that the statute allows the agency to adjust drug payments to align with providers' drug acquisition costs, and the reduced rate of ASP minus 22.5 percent is intended to reflect the average minimum discount for 340B drugs.

HHS also takes issue with the lower court's finding that the payment reduction was so large that it amounted to "fundamental changes in the statutory scheme," thereby exceeding the adjustment authority under the statute. The government argues that the court mistakenly assumed that "Congress intended that Medicare make inflated payments to 340B providers at the expense of other providers and beneficiaries."

The hospitals filed their brief on September 24, 2019, arguing that the district court was correct to find that the payment cuts exceeded HHS’s authority under the Medicare statute. The hospitals note that HHS’s authority to pay for Part B drugs is limited to payment based on survey data showing acquisition costs or, if the data is not available, payment based on drug prices at ASP plus six percent. HHS admits it does not have acquisition cost survey data, and the agency relies on its authority to pay at ASP plus six percent for the 340B payment policy. Although HHS has the authority to adjust payment, hospitals said, the authority does not allow different rates for different types of hospitals, and the reduction of nearly 30 percent goes beyond an “adjustment,” which should be modest in nature.

The government’s reply brief is due October 11, 2019.

Potential Remedy and Alternative Payment Rate

In light of the ongoing litigation, HHS asked for public comments in the 2020 OPPS proposed rule on an "appropriate remedial payment amount" that would be paid to hospitals for 340B drugs if the court rules in favor of the hospitals. HHS asked for comments on whether a rate of ASP plus three percent would be appropriate, both for remedying underpayments in 2018 and 2019 as well as for future payment in 2020. Payment at this alternative rate would continue to be a reduction in payment, as compared to the rate of ASP plus six percent paid to non-340B hospitals, although it would be higher than the current rate for 340B hospitals of ASP minus 22.5 percent.

In support of the alternative rate, HHS referenced the district court's December 2018 opinion, which cited prior Medicare payment reductions of 0.2 percent and 2.9 percent that were allowed under the agency's authority to adjust payment.

HHS also asked for feedback on how to structure the remedy, including whether it should be retrospective, such as on a claim-by-claim basis, or prospective, such as through an increased payment on future claims to address prior underpayments. HHS indicated that any remedy would be budget neutral, which would, therefore, impact payment to non-340B hospitals as well. Under the original payment reduction in 2018, HHS offset the reduced payments for 340B drugs by increasing payment to all hospitals under the OPPS for non-drug items and services.

Issues to Consider

Hospitals are likely to oppose the potential remedy put forward by HHS. The hospital plaintiffs have argued that HHS should make them whole for the payment rates found by the district court to be unlawful, both in 2018 and 2019. This would entail repayments to 340B hospitals for the difference between ASP minus 22.5 percent and ASP plus six percent. The potential remedy of ASP plus three percent would not fully compensate 340B hospitals for the underpayments. Hospitals are also likely to oppose the alternative rate for future payment years, as 340B hospitals have argued they should be paid the same rate as non-340B hospitals.

Moving forward, the approach floated by HHS in the 2020 OPPS proposed rule suggests that future Medicare rulemaking related to Part B drug payments will be intertwined with the litigation challenging the 340B payment cuts. Comments in response to the 2020 OPPS proposed rule are due September 27, 2019. Medicare is expected to issue a final rule outlining 2020 OPPS payment rates in November 2019.

In the 2020 OPPS proposed rule, HHS addressed the timing of the litigation and its role in future rulemaking, indicating that the court would need to issue a decision by March 1, 2020 to provide HHS sufficient time to propose and finalize a remedy for 340B hospitals and budget neutrality adjustments as part of 2021 OPPS rulemaking.

In the meantime, the payment cut under the 2019 payment rates continues to be in effect, including the current policy requiring hospitals to bill with modifiers to identify 340B-acquired drugs. As such, 340B hospitals should continue to bill Medicare as required under the 2019 OPPS final rule and continue using the appropriate modifiers. As we have advised previously, hospitals should also continue to 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 ultimately granted by the courts.

Baker Donelson will continue to monitor the court's actions and OPPS rulemaking and will provide updates on the status of the government's appeal and future OPPS payment rates and billing policies.