Lawsuit dismissed: $1.6B cut to hospitals' 340B payments takes effect

A federal judge on Friday dismissed a lawsuit seeking to block CMS from implementing a $1.6 billion cut to hospital reimbursements under Medicare's 340B drug discount program—although hospital groups suggested they may take further legal action to try to reverse the cuts.

Get the cheat sheet: How does the 340B Drug Pricing Program work?

The lawsuit's dismissal meant CMS could implement the cuts as scheduled on Jan. 1.

About the 340B cuts

The 340B program requires drug manufacturers to provide outpatient drugs to eligible health care providers at discounts ranging from 20% to 50%. About 40% of U.S. hospitals are eligible to participate in the program.

CMS in November 2017 issued a final rule for the Hospital Outpatient Prospective Payment System (OPPS) changing the way hospitals are reimbursed under the program. Previously, hospitals purchased drugs at a discounted rate and are reimbursed at 6% on top of a drug's average sales price, but as of Jan. 1 hospitals are reimbursed at average sales price minus 22.5%, which CMS said would cut payments by $1.6 billion. CMS exempted from the payment cuts Prospective Payment System-exempt cancer hospitals, children's hospitals, critical access hospitals, rural sole community hospitals, and non-excepted hospital outpatient departments reimbursed under the Medicare Physician Fee Schedule. The reimbursement cuts also will not apply to vaccines, according to a CMS fact sheet.

CMS said it would redistribute the $1.6 billion in savings by raising Medicare payments to hospitals for non-drug items and services under OPPS in calendar year (CY) 2018. The agency said it might revisit the payment rate changes in CY 2019. CMS previously said the changes would address rising costs under the program.

Lawsuit details

But hospital groups argued the cuts could jeopardize services at safety-net hospitals. The American Hospital Association (AHA), Association of American Medical Colleges (AAMC), and America's Essential Hospitals (AEH), as well as Eastern Maine Healthcare Systems, Henry Ford Health System, and Park Ridge Health, in November 2017 filed a lawsuit against HHS seeking an injunction to stop HHS from implementing the cuts pending the lawsuit's resolution. The organizations argued that the 340B cuts violate the Social Security Act and exceed the HHS secretary's authority because Congress had intended for hospitals to receive discounts under the program.

HHS in a motion to dismiss the lawsuit claimed that hospitals had "reaped substantial profits" from subsidies under the 340B program's previous system.


U.S. District Judge Rudolph Contreras in his ruling said the hospital groups lacked standing, citing a federal law that prevents providers from taking action against HHS payment rules until Medicare has rejected a claim.

He wrote that hospitals filed the suit prematurely since the rule did not take effect until Jan. 1, adding that the groups will have to reference specific reimbursement claims to move forward with a lawsuit. Contreras wrote, "Plaintiffs' failure to present any concrete claim for reimbursement to the (HHS) secretary for a final decision is a fundamental jurisdictional impediment to judicial review."


Hospital groups and hospitals suggested they will continue to challenge the payment cuts. AHA President and CEO Rick Pollack said, "We are disappointed in this decision from the court and will continue our efforts in the courts and the Congress to reverse these significant cuts." Pollack said, "Making cuts to the program, like those CMS has put forward, will dramatically threaten access to health care for many communities with vulnerable patients."

An HHS spokesperson in a statement said, "Under President Trump, [HHS] has acted to lower the cost of medications for Medicare beneficiaries," adding, "This ruling allows that effort to move forward and advance Trump's strong commitment to addressing the high cost of prescription drugs."

The Alliance for Integrity and Reform of 340B, which includes lobbying groups such as Pharmaceutical Research and Manufacturers of America, said the judge's ruling "echoes the ongoing calls from lawmakers, administration officials, and health care experts to fix the 340B program" (Teichert, Modern Healthcare, 12/29/17; Evans, Wall Street Journal, 12/29/17; Pittman, Politico Pro, 12/29/17 [subscription required]). 

What would the 340B cuts mean for oncology programs in particular?

Given that most Part B drug spending goes towards anti-cancer agents, oncology programs are disproportionately affected by changes to 340B. Join us on Tuesday, Jan. 9 at 3 pm ET to hear a complete analysis of the changes in 2018 Medicare payment for cancer services, including updates on site neutrality and 340B regulations.

Register Now

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