On December 27, 2018, the U.S. District Court for the District of Columbia issued a permanent injunction to the Department of Health and Human Services (HHS) to stop a major reduction in Medicare reimbursement to hospitals and others participating in the 340B Drug Pricing Program.

Background. The 340B Drug Pricing Program, established by Congress in 1992, allows participating hospitals and other health providers to purchase certain “covered outpatient drugs” from manufacturers at steeply discounted rates, and then seek reimbursement for those purchases under Medicare Part B at the normal rates established by the Outpatient Prospective Payment System (OPPS). Providers eligible to participate in the 340B Program include, among others, disproportionate share hospitals, critical access hospitals, federally qualified health centers, similar community-based primary care service providers operating in underserved areas, and certain other federally supported health service providers.

In its 2018 Hospital Outpatient Prospective Payment and Ambulatory Surgical Center (OPPS) final rule published on November 13, 2017, HHS finalized a policy reducing the reimbursement rates for hospitals purchasing drugs through the 340B Program from 6 percent above the average sales price to 22.5 percent below the average sales price, effective January 1, 2018. Because HHS lacked the data to calculate the acquisition cost to 340B hospitals of the drugs, it used the 340B discount of 22.5 percent estimated by the Medicare Payment Advisory Committee. HHS apparently used the savings from these discounts to increase payments across the OPPS system.

The American Hospital Association opposed the proposed reimbursement rates and submitted comments to the proposed rule, arguing that HHS lacked the authority to change the 340B reimbursement rates in the proposed manner, and the reduction of rates by nearly 30 percent would severely impact the affected hospitals’ ability to provide critical health care programs in their communities, particularly to underserved patients.

Litigation. In American Hospital Association, et. al. v. Azar (Civil Action #18-2084) filed in the U.S. District Court for the District of Columbia in late 2017, plaintiffs American Hospital Association, other provider associations, and individual hospitals alleged that the Secretary of HHS’s reduction in reimbursement violated the Administrative Procedures Act and the Social Security Act because it was arbitrary and capricious, contrary to law, and exceeded the Secretary’s authority. The plaintiffs moved for a preliminary or a permanent injunction to force the Secretary to strike the change in payment methodology for 340B drugs and return to the OPPS rule and methodology used in calendar year 2017 for all future payments. The plaintiffs also requested that HHS reimburse the hospitals for the difference between the payment they received under the 2018 OPPS rule and what they would have received if the 2017 OPPS rule had applied.

District Court Decision. In its decision on December 27th, the court denied defendants’ motion to dismiss based on a lack of jurisdiction to review HHS’s administrative action adjusting the 340B drug reimbursement rates and failure to state a claim. The court concluded that the agency’s action was ultra vires and outside the Secretary’s discretion. The court noted that if hospital acquisition cost data is not available, then the statute provides as the default that a given drug’s reimbursement rate shall equal the average price for the drug for the applicable year plus 6 percent, “as calculated and adjusted by the Secretary as necessary for purposes of this paragraph.” 42 U.S.C. § 1395l(t)(14)(A)(iii)(II). The court held that Congress’ limited grant of power to the Secretary to “adjust” did not confer unbridled authority to make basic and fundamental changes to the rate structure, including reducing the reimbursement to 22.5 percent below the average sales price. The court held that in light of the nearly 30 percent reduction from the formula that Congress expressly set and the reduction’s wide applicability, the Secretary had exceeded his authority to adjust the rates. Thus, the court denied the Secretary’s motion to dismiss for lack of subject matter jurisdiction and ruled the plaintiffs had adequately alleged a claim for relief. Consequently, the court entered judgment in favor of the plaintiffs and concluded that the Secretary of HHS had exceeded his authority in setting the 340B drug reimbursement rates in the 2018 OPPS Rule.

Court’s Remedy to be Determined. In their prayer for relief, the plaintiffs had asked the court to apply the 2017 OPPS drug reimbursement, based on average sales price plus 6 percent, to 340B drug payments for the remainder of 2018, and to pay all hospital plaintiffs and program participants who are members of plaintiff associations the difference between the 340B drug payments they received under the 2018 OPPS Rule and the higher payments they would have received under the 2017 OPPS Rule. However, the Secretary claimed that the budget neutrality requirement for Medicare Part B applied to the 340B drug program.

Despite the hospitals’ success on the merits, the court declined to vacate the 2018 OPPS final rule and award payment to the plaintiffs. The court reasoned that increasing the 340B program reimbursement rates for 2018 would require offsets from the increased 2018 OPPS payments made for other non-drug items and services. Because this situation could wreak havoc on Medicare Part B’s OPPS system, and because neither party had thoroughly addressed the remedies in their briefs, the court ordered the parties to submit supplemental briefs on the issue of the appropriate remedy to implement the court’s ruling.

Similarly, the court declined to impose injunctive relief concerning the HHS rule setting the 2019 340B reimbursement rates. The court noted that the complaint did not specifically challenge the 2019 rule, and the plaintiffs had failed to show that they had presented to the Secretary a concrete claim for reimbursement under the 2019 rule. Consequently, HHS is not legally required to revert back to the 2017 reimbursement rate for 2019 unless the hospitals seek another injunction based on the court’s December 27, 2018 opinion.