340B cuts are illegal, judge rules. Is ‘havoc’ coming for hospitals?

A federal district court judge last week ruled HHS unlawfully cut Medicare Part B reimbursements for drugs purchased via the 340B program, siding with the American Hospital Association (AHA) and other hospital groups.

The 340B drug pricing controversy, explained

Background

Medicare's 340B program requires drug manufacturers to provide outpatient drugs to eligible health care providers at discounts ranging from 20% to 50%. The program, created by Congress in 1992 and expanded under the Affordable Care Act, focuses its discounts on hospitals with disproportionately low-income patient populations.

On Jan. 1, 2018, a final rule took effect that changed that way CMS reimburses hospitals for drugs purchased 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, 2018, hospitals were reimbursed at average sales price minus 22.5%, a change CMS estimated will cut payments by $1.6 billion. Those cuts are budget-neutral, and CMS will redistribute the savings by raising Medicare payments to hospitals for non-drug items and services under the Hospital Outpatient Prospective Payment System (OPPS) in calendar year (CY) 2018.

AHA, Association of American Medical Colleges, and America's Essential Hospitals, joined by Eastern Maine Healthcare Systems, Henry Ford Health System in Detroit, and Park Ridge Health, Hendersonville, North Carolina, sued CMS over the cuts in September 2018, arguing the agency lacked the authority to lower the payments.

The lawsuit asks the federal D.C. court to strike down the payment change, stating that "(a) no adjudicator within CMS has authority to invalidate a CMS regulation, and (b) CMS has taken the position that there is no administrative review of 340B Program reimbursement disputes." The groups asked the court to have CMS reimburse hospitals for the difference between what they were paid for under the 2018 rule and what they would have been paid without the cut.

Federal judge sides with hospitals

In the ruling, U.S. District Judge Rudolph Contreras agreed with the plaintiffs that HHS did not have the legal authority to make the payment cuts.

Contreras wrote, "Congress could very well have chosen to treat Medicare reimbursements for 340B differently than reimbursements for other separately payable drugs, but it did not do so." He continued, "To the extent the [HHS] Secretary [Alex Azar] disagrees on policy grounds with Congress' decision … the [s]ecretary may either collect the data necessary to set payment rates based on acquisition costs, or he may raise his disagreements with Congress, but he may not end-run Congress' clear mandate."                                                

Contreras acknowledged that Azar "is permitted to make 'adjustments' to those rates for whatever reasons he deems 'necessary.'" However, Contreras wrote, "He cannot fundamentally rework the statutory scheme—by applying a different methodology than the provision requires."

Contreras noted that typically he would strike down the part of a rule that violates law, but in this case doing so would be disruptive because the payment cut was budget neutral. He wrote, "The retroactive OPPS payments that [p]laintiffs seek here would presumably require similar offsets elsewhere; a quagmire that may be impossible to navigate considering the volume of Medicare Part B payments made in 2018," he said.

As such, Contreras asked that both sides submit briefs on the best way to move forward and avoid the "havoc" of vacating part of the rule.

Reaction

In a joint statement, AHA, AAMC, and AEH praised the ruling, saying it "will help ensure 340B can continue supporting access to affordable health care for our most vulnerable communities." They called the decision "carefully reasoned."

A spokesperson for HHS said the department was disappointed with the ruling and is considering next steps. 

Chip Kahn, president and CEO of the Federation of American Hospitals, which represents investor-owned hospitals, said the ruling was "unfortunate because it undermines HHS efforts to cut drug costs and promote fairer payments." Kahn added that the current policy "will ultimately lower drug costs for patients" and "benefits the vast majority of hospitals, including some 80% of rural facilities. This ruling puts all those benefits at risk."

According to the Wall Street Journal, investor-owned hospitals, which aren't eligible for the 340B program, could see lower payments for other services that Medicare applied the 340B savings to as a result of the ruling.

The Pharmaceutical Research and Manufacturers of America (PhRMA) also criticized the ruling, saying it was a "step back for the 340B program," and that it will undo "progress made to address misaligned incentives in the program that are costing the government and seniors money" (Stein, Inside Health Policy [subscription required], 12/28/18; Morse, Healthcare Finance, 12/28/18; Evans, Wall Street Journal, 12/28/18; Modern Healthcare, 12/28/18).

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