This week, the Friday surprise came courtesy of the D.C. Court of Appeals. In a long-awaited split decision, the court ruled that the U.S. Department of Health and Human Services (HHS) acted lawfully when it reduced Medicare Part B reimbursement to hospitals for 340B drugs by nearly 30%. The reduction in Part B reimbursement was originally proposed in the 2018 Outpatient Prospective Payment Services (OPPS) rule. HHS estimated it would reduce total Part B spending by $1.6 billion annually, and save Medicare beneficiaries millions in copayments. Covered entities sued to overturn the rate cut, and litigation has been ongoing since the rate cut was implemented in early 2018.

Background: 340B Rate Cuts

The litigation focused on the scope of HHS’s authority to adjust Part B reimbursement for 340B drugs. HHS can legally set hospital reimbursement for Part B drugs in one of two ways. First, HHS may set reimbursement by relying on acquisition cost data to approximate hospitals’ average acquisition cost for drugs. If that data is not available, the relevant statute permits HHS to calculate reimbursement using the average price for the drug, “adjusted by [HHS] as necessary . . ..”

Because 340B ceiling prices are confidential, HHS asserted it lacked adequate data on average acquisition cost when it implemented the 340B rate cuts through the 2018 OPPS rule. The agency instead relied on its “adjustment” authority to implement the cuts, reducing Part B reimbursement for 340B drugs from the standard of Average Sales Price (ASP) plus 6% to ASP minus 22.5%. The rate cut applied to most hospitals, Community Mental Health Centers, and Ambulatory Surgical Centers. Hospitals sued. HHS included identical rate cuts in the 2019 and 2020 OPPS rules while the litigation advanced. Ultimately, the District Court found that a Part B reimbursement cut of almost 30% was just too extreme to qualify as an “adjustment,” and HHS thus exceeded its statutory authority. For a detailed walkthrough of the OPPS final rules and litigation up to the D.C. Circuit decision, please see our prior three blog posts here, here, and here.

D.C. Circuit Decision: American Hospital Association v. Alex Azar

On Friday, July 31, the D.C. Circuit issued a 2-1 split panel decision reversing the District Court’s finding that HHS’s reduction in reimbursement for 340B drugs exceeded the agency’s statutory authority. The court held that “HHS permissibly read the statute to allow it to implement the 340B payment reduction.”

The court relied heavily on Chevron deference, a legal doctrine that requires courts to defer to agency interpretations of ambiguous provisions in their authorizing statutes. Here, the statute permits HHS to set reimbursement using the average drug price, adjusted “as necessary for purposes of this paragraph.” The scope of these “purposes” is ambiguous. The central question before the court, therefore, was whether HHS permissibly conceived of the “purposes of this paragraph” when it relied on an estimate of average drug price to “adjust” reimbursement rates down from ASP plus 6% to ASP minus 22.5%.

HHS argued that the purpose of its adjustment authority is to align payments to hospitals with their drug acquisition costs. The agency noted that 340B hospitals typically pay between 20% and 50% below ASP for covered drugs. So, according to HHS, when hospitals provided 340B drugs and were reimbursed by Part B at 106% of ASP, the hospitals generated considerable profits. HHS determined it was “inappropriate for Medicare to subsidize other activities . . . [by 340B hospitals] through Medicare payments” for Part B drugs and moved to “adjust” reimbursement Part B reimbursement for 340B drugs down to a conservative estimate of hospital acquisition cost.

The court acknowledged ambiguity in the “purpose” of the relevant statutory provisions. The majority opinion found that the statute does not “directly foreclose HHS’s interpretation” of the agency’s rate adjustment authority, and HHS’s interpretation was reasonable. The rates cuts themselves, implemented in furtherance of that reasonable purpose, are therefore lawful. The court reversed the judgment of the District Court and upheld the rate cuts for those reasons. The dissenting opinion mostly lined up with the District Court ruling that the adjustment was too extreme to qualify as an adjustment; the dissent also calls on HHS for its failure to conduct an acquisition cost survey of covered entities. 

What Comes Next?

The D.C. Circuit’s decision leaves several open possibilities going forward. First, the hospitals are likely to petition for a rehearing with the full Circuit Court. A rehearing en banc is never guaranteed, but the split decision increases the odds of the court granting it. HHS has two paths forward. First, it can continue to implement the 28.5% rate cut. Alternatively, HHS recently conducted an acquisition cost survey for the 2021 OPPS rule. The agency could utilize data gathered from that survey to institute alternative cuts.

Regardless, the ruling buoyed HHS. A number of the agency’s other recent controversial regulatory initiatives (e.g., Medicaid work requirements and drug price transparency rules) have been struck down in federal court.  The agency will chalk this one up as a win.