July 18, 2018

Appeals court dismisses hospital lawsuit challenging $1.6B cut to hospitals' 340B payments

Daily Briefing

    A federal appeals court on Tuesday dismissed a lawsuit filed by hospital groups over HHS' plans to cut hospital payments under Medicare's 340B drug discount program by $1.6 billion.

    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 were 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 do 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

    Hospital groups have argued the cuts could jeopardize services at safety-net hospitals. America's Essential Hospitals (AEH), the Association of American Medical Colleges (AAMC), and the American Hospital Association (AHA)—as well as Northern Light Health (formerly known 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 the department 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.

    However, 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 a ruling issued last year 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 2018, adding that the groups would have to reference specific reimbursement claims to move forward with a lawsuit.

    Hospital groups and health systems in January appealed the ruling. The hospital groups and health systems in an appeal notice said they disagreed with Contreras' ruling, which they noted does not address the merits of their claims.

    Appeals court upholds lower court's ruling

    A three-judge panel for the U.S. Court of Appeals for the District of Columbia Circuit on Tuesday unanimously rejected the appeal and upheld the district court's ruling. The judges ruled that hospital groups and health systems filed the lawsuit prematurely, before they were affected by the cuts.

    Judge Gregory Katsas in the ruling wrote, "When the plaintiffs filed this lawsuit, neither the hospital plaintiffs, nor any members of the hospital-association plaintiffs, had challenged the new reimbursement regulation in the context of a specific administrative claim for payment. Nor could they have done so, for the new regulation had not yet even become effective. Therefore, they had neither presented their claim nor obtained any administrative decision at all, much less the 'final decision' required under" federal law to challenge Medicare payment changes.

    The judges also rejected the hospital groups' and health systems' argument that they had satisfied those federal requirements by submitting comments on the payment change during the public rulemaking process in 2017, and by filing payment claims to HHS after the district court issued its ruling. Katsas wrote, "Those demands come too late to establish subject-matter jurisdiction in the district court."

    In the ruling, Katsas wrote that, in some cases, it is justified for plaintiffs to seek a judicial review before they have exhausted their options at the administrative level, but for this particular lawsuit, there is no such justification. "The question presented here is not whether they may obtain review of their challenges to the new … reimbursement regulation, but when and how they may do so through the special-review scheme for Medicare claims."


    HHS Deputy Secretary Eric Hargan said the Trump administration "applaud[s] the court's decision." He said, "President Trump and his team at HHS are not afraid to shake up the system—even if it involves an extended fight—and are committed to finding real solutions to make sure American patients and seniors pay less for prescription drugs."

    AEH, AHA, and AAMC in a joint statement said, "We are deeply disappointed that the courts have once again failed to rule on the merits of our case. We will continue our fight to reverse these unwarranted cuts and protect access for patients, and we expect to refile promptly in district court" (Luthi, Modern Healthcare, 7/17; Mershon, STAT News, 7/17; Hellmann, The Hill, 7/17; Diamond, "Pulse," Politico, 7/18; Siddons, CQ Health, 7/17 [subscription required]).

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