On Friday July 31, 2020 the U.S. Circuit Court of Appeals for the District of Columbia Circuit reversed the federal district court and permitted reimbursement cuts for drugs purchased through the 340B Drug Discount Program (“340B Program”). In the 2018 Outpatient Prospective Payment System (“OPPS”) final rule, the U.S. Department of Health and Human Services (“HHS”) finalized a policy to reduce reimbursement rates by close to 30% under the 340B Program. The American Hospital Association, Association of American Medical Colleges, America’s Essential Hospitals, and three hospitals filed a lawsuit challenging the finalized methodology. A federal district court had previously ruled the cuts exceeded HHS’s authority under the 340B statute. This decision comes on the heels of the Court upholding site-neutral payment cuts in the 2019 OPPS final rule. (HL Pulse summary here).

The 340B Program requires drug manufacturers to provide discounts on outpatient drugs to certain categories of eligible hospitals. Hospitals that serve a certain percentage of low income patients as measured by the disproportionate share hospital adjustment percentage are eligible to participate in the 340B program. In the 2018 OPPS final rule CMS finalized a policy that hospital reimbursements under the 340B Program would be reimbursed at the average sales price (“ASP”) minus 22.5%. Historically, 340B Program hospitals have been reimbursed at a rate of ASP plus 6%. The statute is not prescriptive on how the hospitals use their savings from the 340B program, and Congress and regulators have scrutinized these savings in recent years.

The hospitals challenged HHS’ authority for the change in reimbursement methodology, arguing the statute did not permit such an interpretation. Specifically, the statute limits how HHS may calculate the reimbursement rate for specified covered outpatient drugs under section 1395l(t)(14)(A)(iii)(I) and (II):

(I) to the average acquisition cost for the drug for that year (which, at the option of the Secretary, may vary by hospital group (as defined by the Secretary based on volume of covered OPD services or other relevant characteristics)), as determined by the Secretary taking into account the hospital acquisition cost survey data under subparagraph (D); or

(II) if hospital acquisition cost data are not available, the average price for the drug in the year established under section 1842(o), section 1847A, or section 1847B, as the case may be, as calculated and adjusted by the Secretary as necessary for purposes of this paragraph.

HHS had estimated that this change in reimbursement for drugs to 340B Program hospitals would save the government $1.6 billion in 2018 and HHS redistributed the savings through increases in other Part B reimbursement rates. Historically, HHS has not had access to the average acquisition costs and instead has issued payment rates between 104-106% of ASP. In the 2018 OPPS final rule, HHS used the authority under subclause (II) to “adjust” the ASP and created a separate rate for hospitals participating in the 340B Program, with 340B Program hospitals having their reimbursement rate “adjusted” to ASP minus 22.5%. HHS again finalized the reduction in 340B Program reimbursements in the 2019 OPPS, which the hospitals again challenged. The district court ruled against HHS, finding the rate cut exceeded the agency’s statutory authority. HHS appealed the decision.

In examining the merits, the Court held that “HHS reasonably interpreted subclause (II)’s adjustment authority to enable reducing SCOD payments to 340B hospitals, so as to avoid reimbursing those hospitals at much higher levels than their actual costs to acquire the drugs.” Chevron deference carried the day for HHS, with the Court finding that HHS determined the reimbursement rates through notice-and-comment rulemaking whereby it explained why the proposal was within its statutory authority. The Court held that “HHS’s understanding of its statutory authority thus is entitled to Chevron deference.” The Court found that “HHS reasonably concluded that it need not continue subsidizing 340B providers with Part B (i.e. taxpayer) funds and Medicare beneficiaries’ copayments” and could use subclause (II) adjustment authority to bring 340B payments into alignment with acquisition costs.

The Court also rejected the hospitals’ argument that a 28.5% reduction in reimbursement is too large to be considered an “adjustment”, finding that the term “adjust” is ambiguous as to size. Further, the Court stated that “[e]ven if there are limits to what HHS could permissibly consider an ‘adjustment,’ that line has not been crossed here, where the agency acted on a conservative estimate drawn from data of undisputed reliability.”

The plaintiffs have not yet announced whether they will seek review en banc or appeal the decision to the U.S. Supreme Court. A statement from the American Hospital Association called on CMS to “reverse this harmful policy to ensure hospitals can continue to provide the services people need the most.”

Norton Rose Fulbright attorneys will continue to provide relevant updates for healthcare providers on the Health Law Pulse related to the 340B program.