On December 27, 2018, the provider community scored a major victory when the U.S. District Court for the District of Columbia held that the Medicare statute did not authorize the Department of Health and Human Services (“HHS”) to impose a nearly 30% reduction in 340B Reimbursement rates. The legal implications of this decision may be far reaching as the court held for the first time that HHS “acted outside of [its] authority to make adjustments to any Medicare reimbursement rates.” AHA v. Azar, 1:18-cv-02084-RC, ECF No. 25, at 27 (Dec. 27, 2018). However, the exact practical implications are still to be determined as the court ordered further briefing on the appropriate scope of relief. Id. at 36.

Providers participating in the 340B Program have traditionally purchased 340B drugs at steeply discounted rates, and when those hospitals prescribe the 340B drugs to Medicare beneficiaries, HHS reimbursed them at a much higher rate. Providers have relied on this gap between the purchase and reimbursement price to help them provide critical services to their communities, especially the underserved populations. However, HHS views the gap as “profit margin” that may lead to unnecessary utilization and potential overutilization of these 340B drugs.

As previously reported, in November 2017, HHS’s final Medicare hospital Outpatient Prospective Payment System (“OPPS”) for federal fiscal year 2018 drastically reduced Medicare Part B payments to hospitals for separately payable drugs purchased at a discount through the 340B Program. 82 Fed. Reg. at 52,362. Prior to this change, HHS paid hospitals the Average Sales Price (“ASP”) plus 6% for a separately payable drugs (ASP plus 6%). For 2018, HHS paid hospitals ASP minus 22.5% for separately payable drugs purchased through the 340B Program. The provider community strongly opposed this, which reduced payments to 340B hospitals by an estimated US$1.6 billion for calendar year 2018.

After the regulation became effective, numerous non-profit hospitals and hospital associations challenged HHS’s reduction in court, arguing principally that HHS exceeded its statutory authority in implementing this dramatic cut. The court agreed with the hospitals. When HHS changed “the formula from the statutory default of ASP plus 6% to ASP minus 22.5%, [HHS imposed] a nearly 30% reduction from the formula that Congress expressly set as the standard.” AHA v. Azar, at 27-28. Thus, “the rate reduction’s magnitude and its wide applicability inexorably lead to the conclusion that the Secretary fundamentally altered the statutory scheme established by Congress for determining [certain separately payable drugs] reimbursement rates, thereby exceeding the Secretary’s authority” to adjust such rates under the statute. Id. at 28.

This opinion is significant from a legal perspective for two reasons: first, the court excused the plaintiffs for skipping the lengthy administrative process because going through it would have been futile. Id. at 19. If affirmed, this will open the door for future pure legal challenges to skip the administrative process as long as they only question the scope of the agency’s statutory authority. Second, this is the first time that HHS was found to have “acted outside of [its] authority to make adjustments to any Medicare reimbursement rates.” Id. at 27. The court rejected the argument that Congress granted HHS boundless discretion by shielding its Medicare rate adjustment decisions from judicial review. Instead, the court found the term “adjustment” imposed limitations on HHS’s authority. Because HHS’s purported “adjustment” was so drastic that it “fundamentally altered the statutory scheme established by Congress”, it was, “in fact, an ultra vires act (i.e. a patent violation of his authority).” Id.at 26-27

Acknowledging that the plaintiffs are “entitled to some relief, the potential drastic impact of this Court’s decision on Medicare’s complex administration [gave] the Court pause.” Id.at 2 (emphasis in original). Because the budget neutrality requirement under Medicare Part B meant HHS already reallocated billions from the 340B Program to other drugs and services, retroactively increasing 340B reimbursement rates now would require HHS to reduce reimbursements elsewhere in the program. This presents “a quagmire that may be impossible to navigate . . . .” Id. at 35. Thus, the court asked for further briefing on the appropriate remedy.

We will continue to track this case through further briefing and during its likely appeal. We remind providers that they may want to preserve their ability to challenge 340B reimbursement reductions when filing their 2018 cost reports. Further, HHS has continued the 340B reimbursement rate reduction through 2019. 83 Fed. Reg. 58,818, 58,822 (Nov. 21, 2018). We expect similar challenges to the 2019 regulation.