Judge Rejects 2018 Cut to Medicare 340B Payments

Implementation of the decision will follow additional filings requested by the judge—barring an appeal.

Jan. 2—A federal judge recently ruled against a year-old 30 percent cut to Medicare payments for 340B drugs. But the ruling’s implementation—including the effect on 2019 payment—remains to be decided.

On Dec. 27, Judge Rudolph Contreras of the U.S. District Court for the District of Columbia ruled in The American Hospital Association, et al. v. Alex Azar, et al. that the U.S. Department of Health and Human Services (HHS) could not legally implement a 2018 payment redistribution from 340B hospitals to all hospitals under the Medicare Outpatient Prospective Payment System (OPPS). Since the 340B cut started in January 2018, an estimated $1.6 billion was shifted from 340B hospitals.

The payment policy stemmed from a November 2017 final rule from the Centers for Medicare & Medicaid Services (CMS), which reset Medicare payments for drugs obtained under the 340B program from the average sales price (ASP) plus 6 percent to ASP minus 22.5 percent. Almost exactly one year before the recent ruling, a judge rejected a legal challenge to the same 340B cut, saying the challenge was premature.

“Given the early losses and just that it is hard to win on these types of cases, it was generally surprising” that hospital plaintiffs prevailed in the case, said Richard Church, a partner with the law firm K&L Gates.

Hospital advocates generally praised the decision.

“Congress was crystal clear when it created the 340B program to support the work of essential hospitals,” Bruce Siegel, MD, MPH, president and CEO of America’s Essential Hospitals (AEH), said in a written statement. “Now our hospitals can continue their great work caring for the most vulnerable as good stewards of the program. This is a victory for law and common sense.”

However, for-profit hospitals raised concerns about the ruling.

“The current HHS policy will ultimately lower drug costs for patients,” Chip Kahn, president and CEO of the Federation of American Hospitals, said in a written statement. “It also benefits the vast majority of hospitals, including some 80 percent of rural facilities. This ruling puts all those benefits at risk.”

Policy experts said the 340B cut adversely impacted safety net hospitals and academic medical centers, while the redistributed funds benefitted for-profit hospitals and others not in the 340B program.

HHS is expected to appeal the decision.

“I would have to believe that it is almost certainly going to have to be appealed because it is so significant,” said Todd Nova, an attorney with Hall Render.

Implementation Questions

The ruling will have no immediate effect, since Contreras solicited input from the parties on how to implement his decision.

The plaintiffs—the American Hospital Association, the Association of American Medical Colleges, AEH, the Henry Ford Health System, Northern Light Health (formerly Eastern Maine Healthcare Systems), and Fletcher Hospital (doing business as Park Ridge Health)—sought retroactive OPPS payment increases to make up for the cuts. But because those payments would presumably require similar offsets—since the payment cut was budget-neutral—Contreras warned that approach could produce “a quagmire that may be impossible to navigate considering the volume of Medicare Part B payments made in 2018.” 

“In the interest of avoiding that havoc, and because neither party thoroughly addressed the question of remedies in their briefs, the court will order supplemental briefing on this issue,” Contreras wrote.

A footnote also explicitly restricted the decision from applying to 340B payments in 2019, since the challenging hospitals and their advocates had not addressed the future-year implications of the policy that started in 2018, Church said in an interview.

However, prospective impacts on Medicare payments for 340B hospitals could come after expected filings from the parties. That process will take several weeks, according to the judge’s opinion.

“We’ll see from a reimbursement perspective where all this ends up; it is a little bit difficult to divine or read the tea leaves on that,” Nova said in an interview.

Hospitals may hold their claims for a few days to see whether CMS or HHS issues clarification on Medicare 340B payment policies for 2019, Church said.

“They could say, ‘Given the judge’s ruling we’re going to go ahead and pull the [2019 payment] rule back, pending resolution of this case,’ or they could say, ‘Given that the judge’s ruling only applies to the end of 2018, our [2019] rule as drafted still applies and we expect to win on appeal, so continue placing the modifier on and we’re going to continue paying at the lower rate,” Church said.

But Nova doubted CMS will issue a clarification and suggested hospitals instead focus on whether they need to take legal steps to protect their appeal rights under the program—at least for higher-cost claims.

A Limited Impact

Although hospitals have filed legal challenges to several other high-profile CMS payment changes in recent years, the attorneys doubted this latest ruling would substantially affect those cases.

For instance, hospitals and their advocates recently challenged a two-year phase-in of site-neutral Medicare payment cuts. The cuts apply to hospital outpatient clinic services furnished in off-campus provider-based departments (HOPDs) that were previously excepted under the Bipartisan Budget Act of 2015. The HOPD cut will likely be separately litigated since CMS relied on a separate statutory basis to implement that change, said Church.

Nova agreed, noting that the recent ruling is “very limited in its scope and not going to provide any insight into the potential likelihood of success for any of those other disputes.”