Medicare Payment and Reimbursement

340B Ruling: Good News for Some, Maybe

February 20, 2019 3:06 pm

Retroactive OPPS payments sought by plaintiffs in a recent court case would require offsets elsewhere that may result in other healthcare organizations experiencing 340B payment cuts.

Whether a recent federal court ruling that rejected cuts to the 340B Drug discount drug program was good news remains unclear, according to Emily Jane Cook, JD, a partner with the Los Angeles office of McDermott Will & Emery. 

The case— American Hospital Assn. v. Azar , filed early last year by the American Hospital Association (AHA), the Association of American Medical Colleges, and America’s Essential Hospitals, and joined by numerous other associations and interested parties as friends of the court—challenged the nearly 30 percent cuts to the 340B program made by the Centers for Medicare and Medicaid Services (CMS) in its 2018 updates to the Outpatient Prospective Payment System (OPPS).


The 340B program, of course, allows participating hospitals and other “covered entities” to purchase certain drugs from manufacturers at discounted rates and seek payment from Medicare at the rates set by the OPPS. Prior to 2018, payment was set at the drugs’ average sale price (ASP) plus 6 percent. Because hospitals could purchase the covered 340B drugs at discount, there was a favorable gap between their cost and the available Medicare payment. But in the 2018 rule, CMS reduced the payment rate to 22.6 percent below ASP. 

In their lawsuit, the plaintiffs—essentially safety net hospitals and academic medical centers— argued that the revenue derived from the program helped them provide essential services to their communities. The government, however, was concerned about overutilization, and it concluded that lowering the payment rates would align more closely with the actual cost of acquisition while still allowing hospitals to provide access to care. But CMS did not have the data necessary to calculate the actual prices paid by 340B hospitals for any specific drug, so it estimated the costs based on hospitals’ average 340B discounts.

Program participants strongly opposed the proposed 340B reimbursement rate reduction and commented on it during the public comment period in late 2017. They argued that CMS did not have legal authority to make the change and the reduction would severely affect their services, especially their ability to provide care to underserved populations. These arguments did not result in a change to the proposed rule, and the plaintiffs filed suit immediately after the new rates took effect. 

Procedural Aspects

Cook explains that after the case was initially dismissed on procedural grounds, the plaintiffs refiled in September of last year. “They asked the court to require CMS to apply the ‘ASP plus 6 percent’ methodology for the remainder of 2018 and in future years and to make up the difference between what they got under the 2018 Rule and the higher amounts they should have received without the changes,” Cook says. 

In his Dec. 27, 2018, decision, Judge Rudolph Contreras of the U.S. District Court for the District of Columbia granted the plaintiffs’ motion for a permanent injunction but called for supplemental briefing on what the appropriate remedy should be. 

Analysis and Key Takeaways

Reinstituting the 2017 OPPS payment methodology might be difficult because the law allowing adjustments to OPPS required that any such changes be done in a “budget neutral manner.” The 2018 changes allowed the government to increase payment for other Medicare Part B drugs and services, and a provider that is not a safety net hospital or academic medical center stands to benefit from those increases. Such a facility might be opposed to returning to the 2017 rates.

Judge Contreras was aware of this conundrum when he wrote, “The retroactive OPPS payments that Plaintiffs seek here would presumably require … offsets elsewhere; a quagmire that may be impossible to navigate considering the volume of Medicare Part B payments made in 2018.” 

As Cook explains, “Judge Contreras indicates that he believes it would be highly disruptive to pay 340B hospitals at the 2017 rate plus retroactive payments because of the ‘budget neutrality’ requirement. It would be similarly difficult to increase reimbursement rates to account for the losses under the 2018 payment policy because doing so would require CMS to retrospectively reduce reimbursements on all other hospital outpatient services. As stated in the court’s opinion, this would likely ‘wreak havoc’ across the Medicare hospital outpatient payment system.”

She adds, “The Court will issue a ruling on remedies sometime after additional briefs addressing possible remedies have been filed, and it is unclear what those remedies might be and whether CMS will appeal.” 

Cook lists two other takeaways concerning the AHA v. Azar case:

  • The court’s decision did not address the application of additional payment reductions effective in 2019 for 340B drugs dispensed at off-campus outpatient locations. That issue is the subject of a separate AHA lawsuit challenging the 2019 OPPS Rule.
  • For now, hospitals should expect to continue to be paid at the reduced rates under the 2018 OPPS Rule.

Finally, Cook notes that CMS recently announced its intention to establish an “International Pricing Index” demonstration project under which the agency would substantially alter how and how much it pays for Part B drugs. If that demonstration is advanced and implemented, it too could affect the outcome and implications of this case.

J. Stuart Showalter, JD, MFS, is a contributing editor for HFMA.

Interviewed for this story:

Emily Cook is a partner in the Los Angeles office of McDermott Will & Emery.


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