Hospitals Win Permanent Injunction Against Lowered Medicare Reimbursement Rates for 340B Drugs; Remedies to be Determined

On December 27, 2018, Judge Rudolph Contreras of the United States District Court for the District of Columbia (the Court) granted a group of hospital associations’ and individual non-profit hospitals’ request for a permanent injunction related to new Medicare Part B reimbursement rates for certain outpatient drugs purchased under the 340B Program.

As analyzed previously in Arent Fox Health Care Counsel, the Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs final rule for calendar year 2018 (the Final Rule) implemented a major change in how certain 340B Covered Entities would be reimbursed for specified covered outpatient drugs and biologicals that were purchased under the 340B Program. Per the Final Rule, Rural Referral Centers, Critical Access Hospitals, and Disproportionate Share Hospitals that qualify as 340B Covered Entities would see reimbursement for SCODs reduced to a rate of 22.5 percent of the drug’s average sales price for SCODs purchased under the 340B Program. This shift in reimbursement stands in stark contrast to how hospitals were reimbursed for the very same drugs prior to the effective date of the Final Rule; prior to January 1, 2018, hospitals were reimbursed for the full ASP of the applicable drug plus a six percent add-on regardless of whether the SCODs were purchased at or below the 340B Ceiling Price under the 340B Program or outside the 340B Program at commercial prices. Rural Sole Community Hospitals, Children’s Hospitals, and PPS-exempt Cancer Hospitals were spared the lowered reimbursement methodology per the Final Rule and continue to be reimbursed for SCODs at ASP plus six percent, regardless of whether such SCODs were acquired at or below the 340B Ceiling Price under the 340B Program.

A group of hospital associations and several individual institutions challenged the implementation of the Final Rule by filing suit. The plaintiffs alleged that the reimbursement rate reduction for SCODs purchased at or below the 340B Ceiling Price under the 340B Program violated the Administrative Procedure Act and the Social Security Act because it is “arbitrary and capricious and contrary to law, and in excess of the Secretary’s authority under the Medicare provisions of the Social Security Act.” The plaintiffs sought either a preliminary injunction or a permanent injunction of enforcement of the reimbursement reduction. In addition, the plaintiffs requested that the Court strike the 340B reimbursement changes in the Final Rule and refund the plaintiffs the difference between the payments they received under the Final Rule and the payments they would have received at the higher rate under the 2017 OPPS Rule.

The Court held that the Secretary of the Department of Health and Human Services acted outside of his statutory authority in making the reimbursement change from the statutory benchmark rate of ASP plus six percent “when he reduced that rate to ASP minus 22.5 percent based on his estimation of 340B hospitals’ drug acquisition costs, rather than the drugs’ average sales prices.” Also, the Court held that the change in reimbursement was “so substantial as to be a patent violation of the Secretary’s § (t)(14)(A)(iii)(II) adjustment authority” because the rate adjustment at issue

does not affect a single drug or even a handful of drugs, but rather potentially thousands of pharmaceutical products found in the 340B Program. Moreover, the changes that the Secretary imposed are not modest. Indeed, by changing the formula from the statutory default of ASP plus six percent to ASP minus 22.5 percent, the Secretary is imposing a nearly 30 percent reduction from the formula that Congress expressly set as the standard. When viewed together, 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 SCOD reimbursement rates, thereby exceeding the Secretary’s authority to “adjust[]” SCOD rates under § (t)(14)(A)(iii)(II).

While the Court ultimately granted the plaintiff’s request for a permanent injunction, it declined to award the other relief sought – namely the refund of the difference between the payments they received under the Final Rule and the payments they would have received under the 2017 OPPS Rule (ASP plus six percent), since such an award would likely violate the budget neutrality requirements applicable to Medicare Part B. Instead, the Court requested that both plaintiffs and the Secretary engage in supplemental briefing as to what remedies are appropriate. The parties have until January 26, 2019, to submit their supplemental briefs.