On November 1, 2017, the Centers for Medicare & Medicaid Services (CMS) issued the final rule with comment period revising the Medicare hospital outpatient prospective payment system (OPPS) and the Medicare ambulatory surgical center (ASC) payment system for 2018. Among the changes, the rule reduces reimbursement for certain drugs procured under the 340B program from the average sale price plus 6% to the average sale price minus 22.5%, effectuating a nearly 30% cut in reimbursement for these drugs. See 82 FR 52356-01.

CMS contends that this reduced reimbursement measure will more accurately reflect the post-340B discount acquisition cost of drugs for covered hospitals and will lower drug costs for Medicare beneficiaries, whose copays are tied to Medicare reimbursement rates. In total, CMS estimates that the new rule will save Medicare $1.6 billion on OPPS drug expenditures, which will be redistributed to all providers within the OPPS system, because adjustments must be made in a budget-neutral manner.

On November 13, 2107, three hospital associations and three member hospitals sued the Department of Health and Human Services (HHS) and Eric D. Hargan in his official capacity as the Acting HHS Secretary to strike the payment methodology changes, alleging that the amendment exceeded the HHS Secretary’s (the Secretary) authority under the Social Security Act and will adversely impact affected hospitals’ ability to serve communities in general and vulnerable populations in particular.1 The lawsuit is The American Hospital Association, et al. v. Hargan, No. 1:17-cv-02447-RC (D.D.C.). Bipartisan federal legislation, H.R. 4392, also seeks to reverse the cuts.

The 340B Program

The 340B program allows select providers known as “covered entities” to obtain reduced prices on “covered outpatient drugs” from manufacturers, which must offer the discounts as a condition of having their drugs covered through state Medicaid programs. The prices cannot exceed a “ceiling price” calculated pursuant to a statutory formula. 42 U.S.C. § 256b(a)(1).

The goal of the 340B program is to enable covered entities to “maximize scarce Federal resources, … reach[] more eligible patients, and provid[e] care that is more comprehensive.” H.R. Rept. No. 102-384(II), at 12 (1992).

The 340B program, initially available to certain publicly funded and not-for-profit hospitals and clinics that served low-income patients, was expanded in 2010 by the Patient Protection and Affordable Care Act (ACA) to additional providers, including certain children’s hospitals, free-standing cancer hospitals, critical access hospitals and sole community hospitals. Approximately 40% of all hospitals now participate.

Medicare Drug Reimbursement and Rulemaking

Reimbursement Methodology and Prior Rates

Medicare Part B covers outpatient hospital care and pays for certain designated services, including drugs, under the OPPS. CMS updates OPPS rates annually and may set rates for separately payable drugs, i.e., drugs that are not bundled with other outpatient services, in one of two ways. The payment amount is based either on “the average acquisition cost,” or “if hospital acquisition cost data are not available,” on “the average price …” See 42 U.S.C. § 1395l(t)(14)(A)(iii). The default statutory rate for the second option is “106 percent” of the “average sales price,” (ASP) or ASP+6%, but may be “calculated and adjusted by the Secretary as necessary …” Id.

Since 2006, when CMS began setting OPPS stand-alone drug reimbursement rates pursuant to the above methodology, payment has been based on the average sales price, ranging from ASP+4% to ASP+6%, because CMS could not obtain reliable acquisition cost data. CMS explained, however, that these rates approximated acquisition costs. From 2013 until the recent rule change, CMS set reimbursement at the ASP+6% statutory default rate.

2018 Rule

For 2018, CMS will reduce reimbursement for separately payable drugs acquired under the 340B program from ASP+6% to ASP minus 22.5%, which amounts to an almost 30% reduction from prior rates. Vaccines and certain hospitals—rural sole community hospitals, children’s hospitals and prospective payment system-exempt cancer hospitals—are excluded from this payment adjustment in 2018. Additionally, the payment reduction will not affect hospitals reimbursed outside of the OPPS, such as critical access hospitals. In all, the adjustment affects approximately half of 340B covered entities.

CMS explained that the rule aims to lower the cost of prescription drugs for Medicare beneficiaries and furthers the Trump administration’s broader efforts to reduce pharmaceutical prices. CMS justified the new rule based on reports showing that, at current rates, hospitals generate substantial profits, subsidized by Medicare beneficiaries, and that the existence of a profit motive impacts prescribing behavior. Therefore, CMS sought to better align reimbursement rates with hospitals’ 340B acquisition costs.

First, CMS explained that the new rate more accurately reflects the acquisition costs of drugs by 340B hospitals based on a May 2015 report by the Medicare Payment Advisory Commission (MedPAC),2 which found that 22.5% of the ASP is the minimum average discount received by 340B hospitals for drugs paid under OPPS. Other studies indicate that discounts may be even higher. For example, a 2015 Government Accountability Office report estimated that the 340B discounts range from 20% to 50%. A 2015 HHS Office of Inspector General report found that Medicare payments exceeded 340B ceiling prices by 58%.

Additionally, CMS cited reports indicating that 340B hospitals prescribed more drugs or more expensive drugs compared with their noneligible counterparts, suggesting that program incentives impacted treatment decisions. The 340B hospitals outpaced non-340B providers in terms of both overall Medicare spending growth and per-beneficiary expenditures. Discrepancies were not explained by differences in hospital characteristics or patients’ health status.

The new methodology is expected to save CMS $1.6 billion in drug reimbursement expenditures. These savings will be redistributed within the OPPS system, because OPPS adjustments must be budget-neutral. That is, adjustments for a year may not cause the estimated amount of expenditures for the year to increase or decrease from the estimated amount of expenditures that would have been made without the adjustments.

Ensuing Litigation

Allegations in Plaintiffs’ Complaint and Plaintiffs’ Motion for a Preliminary Injunction

On November 13, 2017, three hospital associations and three member hospitals filed a lawsuit in the United States District Court for the District of Columbia, seeking to strike the OPPS rate changes for affected 340B hospitals. Plaintiffs claim that the new rule violates the Social Security Act, and therefore should be set aside pursuant to the Administrative Procedure Act (APA) as unlawful and in excess of the Secretary’s statutory authority.

Plaintiffs argue that the Secretary exceeded statutory authority in two ways. First, in adjusting the statutory rate of ASP+6% to ASP minus 22.5% on the ground that the new formula better approximates the average acquisition cost of drugs for 340B-eligible hospitals, CMS created a hybrid payment methodology that imported consideration of average acquisition cost from 42 U.S.C. § 1395l(t)(14)(A)(iii) subpart (I) into the formula based on ASP in subpart (II), without satisfying the requirements of either of the two statutory options.

Plaintiffs allege that the adjustment is improper under subpart (I) because rates cannot be set based on average acquisition cost without using “statistically significant” “hospital acquisition cost survey data,” 42 U.S.C. § 1395l(t)(14)(A)(iii)(I), (D), which CMS does not have. They argue the adjustment is improper under subpart (II), which CMS purports to apply, because an adjustment made in order to approximate acquisition costs is not a “calculat[ion] or adjust[ment] … as necessary” of the “average price for the drug …” Id. § (A)(iii)(II). Nor is a nearly 30% departure from the statutory default rate of ASP+6% properly characterized as an “adjustment,” which plaintiffs claim must be limited to minor changes to account for overhead and similar expenses.

Second, plaintiffs claim that CMS, in seeking to align the acquisition costs of 340B beneficiaries with Medicare reimbursement rates, in fact thwarts the 340B statutory scheme which, to the contrary, was designed to generate funding for eligible hospitals vis-à-vis the existence of this very differential.

Plaintiffs allege that the new rule would immediately cut essential health programs and move for a preliminary injunction to avert irreparable harm.

Defendants’ Motion to Dismiss and Opposition to a Preliminary Injunction

In response, on December 1, 2017, defendants filed a motion to dismiss. HHS argues that plaintiffs fail to state a claim, both due to procedural impediments and on the merits. Procedurally, HHS contends that the claim fails for three reasons. First, the court has no jurisdiction because all administrative and judicial review of “the development of the [OPPS] classification system,” including adjustments, and fee schedule amounts for particular drugs, is foreclosed by statute. 42 U.S.C. § 1395l(t)(12)(A), (E). Second, the action is unreviewable because statutory authority to adjust OPPS payment rates “as necessary,” is not limited by any governing principle, and, as a result, is left to the Secretary’s discretion by law. Third, plaintiffs are not properly before the court because they failed to exhaust administrative remedies.

Defendants also argue that plaintiffs’ claim fails on the merits. Contrary to plaintiffs’ assertions, the statute does not restrict the amount of adjustment nor preclude the Secretary from considering “acquisition cost” when making an “adjustment as necessary” to rates determined based on ASP. Therefore, the Secretary may properly consider whether reimbursement methodology gives providers outsized profits at the expense of Medicare beneficiaries.

Defendants likewise argue that the new rule does not undermine the 340B program, nor would it be relevant if it did. Defendants emphasize that the 340B program and the Medicare program are distinct programs administered by separate agencies, which makes congressional intent for the 340B program immaterial to Medicare Part B and OPPS rate setting, and likewise makes it impossible for the Secretary to exceed authority to set OPPS rates by undermining the goals of an entirely different statute.

Moreover, defendants argue that the rule does not in fact undermine the 340B program. First, because the 22.5% downward adjustment for ASP reflects only the minimum discount, it will not eliminate the differential between Medicare reimbursement and acquisition costs and will still allow hospitals to retain a profit. Moreover, the core purpose of the 340B program, to lower acquisition costs of drugs for 340B entities, remains intact regardless of Medicare reimbursement. Under any circumstance, defendants argue that the Secretary is entitled to Chevron deference because the Secretary’s interpretation of the rate-setting provisions is reasonable.

Defendants oppose the motion for a preliminary injunction because they contend plaintiffs have not shown a likelihood of success on the merits, will suffer a purely economic (and thus not irreparable) injury, and also because the harm to defendants from the imposition of a preliminary injunction will outweigh any detriment to plaintiffs. Adjustment to any portion of the OPPS will require offsets to other reimbursement provisions because of budget neutrality requirements, and therefore will have systemwide effects due to the interdependent nature of the overall OPPS reimbursement scheme.

The hearing on the motion to dismiss and the application for a preliminary injunction is scheduled for December 21, 2017, before Judge Rudolph Contreras.

Contemplated Legislation

On November 15, 2017, Representatives Mike Thompson (D-CA) and David B. McKinley (R-WV), introduced H.R. 4392 to reverse the cuts. This proposed legislation follows a September 28, 2017, letter, signed by 228 representatives from both parties, urging CMS not to adopt the then-proposed rule as final. The bill has been referred to the Committee on Ways and Means and the Committee on Energy and Commerce. No further action has been taken to date.


In light of the pending litigation and legislation, the future of CMS’s rulemaking is uncertain. The court is scheduled to hear HHS’s motion to dismiss and plaintiffs’ motion for a preliminary injunction on December 21, 2017.