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October 4, 2022

Federal judge rules HHS must restore full 340B payments

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    A federal judge last week ruled that HHS must restore full payments to the 340B program for the remainder of 2022—a move that hospital industry leaders say is an "important victory" for 340B hospitals that have faced years of underpayments.


    The 340B program requires drug manufacturers to provide significant discounts on certain medications sold to safety-net providers. Some discounts may be as large as 50%, Modern Healthcare reports.

    According to data from the University of Southern California, participation in the 340B program has grown from 8,100 providers in 2000 to 50,000 in 2020. Hospitals that serve a high number of low-income patients, those designated as critical access facilities, children's and cancer hospitals, and federally qualified health centers are among those eligible to participate in the 340B program.

    In 2018, HHS reduced the reimbursement rates for hospitals participating in the 340B program by 28.5%—a move that generated roughly $1.6 billion in savings during the first year, which the agency said it would redistribute by raising Medicare payments to hospitals for non-drug items and services.

    In response to HHS' rule, the American Hospital Association (AHA), along with other provider groups, argued the agency exceeded its authority and that the payment cuts were illegal because CMS did not survey hospitals to determine their average drug costs acquisitions, instead relying on the "average price" for each drug.

    In 2020, the U.S. Court of Appeals for the District of Columbia Circuit court upheld HHS' policy. However, the Supreme Court in June reversed the decision, saying that the cuts were "unlawful." In a unanimous decision, the Court said HHS violated protections set against varying payment rates for certain hospitals by not surveying hospitals' drug acquisition costs.

    "Absent a survey of hospitals' acquisition costs, HHS may not vary the reimbursement rates only for 340B hospitals; HHS's 2018 and 2019 reimbursement rates for 340B hospitals were therefore unlawful," Justice Brett Kavanaugh wrote in the Court's opinion. "Under the text and structure of the statute, this case is therefore straightforward."

    "In short, the statute allows HHS to set reimbursement rates based on average price and affords the agency discretion to 'adjust' the price up or down. But unless HHS conducts a survey of hospitals' acquisition costs, HHS may not vary the reimbursement rates by hospital group," Kavanaugh continued.

    Federal judge rules HHS must stop cuts to the 340B program

    Following the Supreme Court's decision, CMS announced it would reimburse 340B drugs at the same rate as non-340B drugs, leading participating hospitals to push back against the decision. Ultimately, a remedy for this decision was directed to the U.S. District Court for the District of Columbia.

    Last week, Judge Rudolph Contreras ruled against HHS, saying the agency must restore full 340B payments for the remainder of 2022.

    According to Contreras, the 2022 reimbursement rate is "defective," and vacating this section of the Outpatient Prospective Payment System (OPPS) rule "will not cause substantial disruption."

    Although HHS argued that vacating the payment reduction could cause budget neutrality issues, Contreras said any issues would be "minimal" since the agency itself "admits that vacating the 340B reimbursement rate for the remainder of 2022 would account for 'only a small sliver of the overall time periods challenged in this action.'"

    "In short, the Court finds that any disruption that will be caused by vacating the prospective portion of the 2022 OPPS Rule's 340B reimbursement rate does not rise to the level of justifying remand without vacatur," Contreras wrote.


    According to Fierce Healthcare, hospital industry leaders have praised the court's decision and are awaiting future rulings that will help remedy years of 340B underpayments.

    "This is an important victory for 340B hospitals that have been fighting these unlawful Medicare cuts for nearly six years," said Maureen Testoni, president and CEO of 340B Health. "The Centers for Medicare & Medicaid Services (CMS) has the clear responsibility to restore the appropriate payments for 340B drugs immediately, and now a federal court has ordered it to do so without delay."

    Melinda Hatton, general counsel and secretary for AHA, noted that the halt in payment cuts will allow hospitals to continue to provide services to patients in their communities. In a statement, Hatton said AHA is already looking ahead to the court's next decision on 340B payments.

    "We continue to urge the administration to promptly reimburse all the hospitals that were affected by these unlawful cuts in previous years and to ensure the remainder of the hospital field is not penalized for [the] prior unlawful policy," she said.

    Similarly, Shahid Zaman, policy manager at America's Essential Hospitals, said her organization is looking "forward to a favorable resolution on the remedy for the five years and billions of dollars of cuts to 340B hospitals." (Berryman, Modern Healthcare, 9/29; Muoio, Fierce Healthcare, 9/29)


    Advisory Board's take

    3 considerations for the future of the 340B program

    By Chloe Bakst and Lindsey Paul  

    340B reimbursement has long been a controversial topic, most recently pitting 340B hospitals against CMS, private practices against 340B hospitals, and pharmaceutical manufacturers against contract pharmacies.

    With the Supreme Court's decision earlier this year to deem CMS' 2018 340B rate cut unlawful and the lower court's recent decision requiring CMS to immediately raise 340B hospital reimbursement back to the original rate of 106% of average sales price, 340B hospitals come out on top—for now. This is especially welcome news for covered entities that have struggled with lost 340B contract pharmacy revenues amidst the ongoing dispute with pharmaceutical manufacturers. In fact, with this decision, 340B hospitals can expect to see nearly two billion dollars in additional revenue in 2023.

    Moving forward, 340B covered entities must think strategically rather than assume that the higher 340B reimbursement rate is the new status quo because this ruling leave the future of 340B uncertain. Both 340B covered entities and non-340B hospitals need to begin thinking through these questions and prepare to be nimble and responsive to changes in the coming years.

      1. How will reimbursement be impacted across the board?

      CMS will likely have to cut rates for non-drug services to account for higher 340B reimbursement, especially since part of HHS' argument in the latest court battle was related to budget neutrality. We anticipate CMS will implement these rate cuts in January 2023 through a lowered conversion factor.

      And while providers at 340B-eligible health systems can expect to see an increase in drug reimbursement right now, many questions remain when it comes to how long this will last and how it will impact 340B organizations over the long term. For example, we don't yet know if higher reimbursement will drive additional volumes into the hospital setting.

      2. How long can 340B entities expect to see this increased rate?

      Though recent litigation has led to an immediate 340B rate increase, the Supreme Court also gave CMS a clear path to lower the rate again in the future. Given CMS' actions over the last five years, it's unclear whether the agency will want to maintain this higher 340B reimbursement rate for long.

      3. What does this mean for the future of the 340B program?

      The court must decide how CMS should make up for underpaying 340B hospitals from 2018 to 2022. We'll be keeping an eye out for this decision, along with any impact it will have on reimbursement to non-340B hospitals and budget neutrality. In the meantime, we're watching to see how recent 340B litigation influences CMS' reimbursement decisions in its 2023 final rule for hospital outpatient departments and ambulatory surgical centers. There's also no telling whether the Court's decision will have any influence over the other 340B payment fight happening right now between manufacturers and contract pharmacies.

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