On July 31, 2020, the US Court of Appeals for the District of Columbia Circuit held that the Centers for Medicare and Medicaid Services (CMS) has authority under the Social Security Act to reduce Medicare payment rates for 340B drugs reimbursed under the Medicare Hospital Outpatient Prospective Payment System (OPPS). This decision reverses a prior district court ruling and preserves the payment cuts for the foreseeable future.

IN DEPTH

Background

Since 2018, the CMS OPPS rules have reduced hospitals’ Medicare Part B reimbursement for 340B drugs from Average Sales Price (ASP) plus 6% to ASP minus 22.5%, a reduction of almost 30%. Almost immediately after the release of the 2018 Final Rule, a group of hospitals and hospital associations sued the government, alleging that CMS did not have statutory authority to implement the payment cut. In December 2018, the US District Court for the District of Columbia held that, in making these reductions, CMS had exceeded its authority, partly because CMS did not have sufficient data to support the reductions. Our prior On the Subject, “Court Issues Permanent Injunction Blocking Medicare 340B Payment Cuts,” provides an overview of the district court’s decision and analysis.

The DC Circuit Decision

On July 31, 2020, the US Court of Appeals for the DC Circuit reversed the district court’s ruling, finding that CMS’s decision to lower 340B drug reimbursement rates was based on a “reasonable interpretation of the Medicare statute.” The DC Circuit focused on whether CMS “permissibly conceived” of the purposes of the Medicare statute governing OPPS payment rates for 340B drugs when it reduced reimbursement rates for 340B drugs specifically. After analyzing the Medicate statute’s structure, ambiguities and implications, the court found that CMS was permitted to interpret the intent of the statute as compensating hospitals for the costs they incur to acquire outpatient drugs. Based on that interpretation, the court concluded that it was reasonable for CMS to exercise its statutory authority to “adjust” reimbursement rates for 340B drugs to more closely align with hospitals’ costs to acquire those drugs.

Notably, the DC Circuit’s decision was not unanimous. Two of the three judges who heard the case concluded that the reimbursement reduction was permissible, but the third judge found that the reimbursement reduction was unauthorized by statute. She opined that the statute does not authorize CMS to institute large reimbursement reductions for distinct hospital groups (i.e., for 340B covered entity hospitals only) without average acquisition cost data for those hospitals derived from a survey that meets certain requirements. The dissenting judge concluded that, absent that data, CMS must establish reimbursement rates across hospital groups based on ASP, subject to limited adjustments.

The hospital litigants may ask for a rehearing by the full panel of judges at the DC Circuit, and if the litigants do not request such a rehearing, they may further appeal the case to the Supreme Court of the United States. Acceptance of either of these appeal options is discretionary by the applicable court, so there is no guarantee that the litigation will continue or that the hospitals will prevail in any appeal.

Key Considerations

The DC Circuit’s decision is a significant win for the government, as well as for non-340B OPPS hospitals, which benefit from the payment cuts because of budget-neutral redistribution of the reimbursement amounts “saved” through the 340B payment cuts. Further, absent a reversal of the recent DC Circuit decision, it is highly unlikely that 340B OPPS hospitals will receive retrospective OPPS reimbursement for 340B drugs administered or dispensed in 2018, 2019 and 2020, as was contemplated as a potential outcome following the lower court decision.

However, the split decision at the DC Circuit, when viewed in the context of a favorable district court holding, suggests that both CMS and the hospital appellants have arguments that could be persuasive upon further appeal, if such appeal is granted. The hospital associations involved in the litigation have released a joint statement indicating that they “will continue to fight for our hospitals and their patients, and [they] call on CMS to reverse this harmful policy to ensure hospitals can continue to provide the services people need the most.”

Further appeals will require an extended period of time for resolution. For reference, CMS filed its appeal with the DC Circuit in July 2019, more than a year before the court announced its decision. In light of the annual OPPS rulemaking timeframe and the complexity of resolving widespread historic underpayments, hospitals should assume that the 340B payment cuts will continue into the near future.

CMS recently launched a drug acquisition cost survey to collect information regarding 340B hospitals’ net acquisition costs for 340B-purchased drugs, described in our previous On the Subject, “CMS Releases 340B Drug Acquisition Cost Survey, Responses Due May 15, 2020.” CMS indicated that the purpose of the survey was to collect data necessary to establish acquisition cost payment rates for 340B drugs dispensed to hospital Medicare patients. The survey appeared to be an administrative fallback process intended to provide CMS a pathway to continue its reduced reimbursement rates in the event the DC Circuit sided with the hospitals and the district court. However, CMS may also use the survey acquisition cost data to further reduce reimbursement rates for 340B drugs beyond ASP minus 22.5%.