Remedies for 340B underpayments remain up in the air after court declines to provide guidance

A federal court is allowing the U.S. Department of Health and Human Services (HHS) to decide on remedies covering Medicare underpayments to hospitals for drugs purchased through the 340B Drug Pricing Program.

Healthcare provider plaintiffs had hoped the U.S. District Court for the District of Columbia would dictate terms. But in an opinion published Jan. 10, the court declined to impose specific remedies.

“When a plaintiff brings an [Administrative Procedure Act] claim to set aside an unlawful agency action, it is the prerogative of the agency to decide in the first instance how best to provide relief,” Judge Rudolph Contreras wrote, quoting a prior case.

Hospitals and health systems participating in 340B are due remedies after a Supreme Court decision last June established that the Medicare payment rate for 340B drugs was unlawful as it stood between January 2018 and September 2022. During that span, HHS (specifically CMS) dropped the payment rate from average sales prices (ASP) plus 6% to ASP minus 22.5%. The higher rate was restored in late September in the aftermath of the Supreme Court ruling and remains in place for 2023.

The district court previously agreed with providers that remedies should cover underpayments through September 2022. The time frame had been in question because the case that reached the Supreme Court technically involved only 2018 and 2019 payments.

Now it remains to be seen what form the remedies will take. The matter could be settled within the next several months, with HHS having said it would issue a proposal in advance of the 2024 proposed rule for hospital outpatient payments.

Details of the opinion

Contreras (an Obama appointee) cited a prior case as establishing that court-ordered relief would be appropriate if there were “only one rational course for the agency to follow upon remand.” Provider plaintiffs, led by the American Hospital Association (AHA), took up that argument, saying the only justifiable remedy is for HHS to make up the full underpayment to each affected provider.

But Contreras doesn’t see it that way.

“To the extent plaintiffs seek an order commanding HHS to repay each underpaid claim to the penny, that cannot possibly be the only rational choice available to the agency,” he wrote. “As plaintiffs readily acknowledge, HHS could seek to implement a remedy such as a prospective one-time rate increase that avoids calculating individual claims.”

Requiring precise payments for all affected hospitals would create chaos, Contreras wrote, partly because statutory mandates involving budget neutrality would necessitate lowering the rate for other Medicare Part B payments that were made in 2018-2022 — and, as a result, recouping numerous overpayments. While the plaintiffs argued recoupment should not be required, Contreras said the uncertainty signals the likelihood of substantial disruption in the event the higher payment rate were implemented for the years in question.

Even putting budget neutrality aside, the judge wrote, “the staggering value and number of transactions at issue” make a court-ordered dollar-for-dollar remedy impractical.

An order also is not necessary to ensure prompt movement on the remedies, he wrote. The court will not retain jurisdiction while HHS determines and distributes the remedies, but it “expects that HHS will act promptly to remediate its underpayments.”

Diverging provider perspectives

AHA, the Association of American Medical Colleges and America’s Essential Hospitals — all of which were plaintiffs in the case — expressed disappointment in the decision.

“We look forward to continuing to work with the [Biden] Administration to develop a plan to swiftly repay 340B hospitals, with interest, while ensuring the remainder of the hospital field is not penalized as they too continue to serve and care for their patients and communities,” Melinda Hatton, general counsel and secretary with AHA, said in a written statement.

The reference to hospitals being “penalized” is in the context of budget neutrality. Those requirements theoretically mean reducing reimbursement to non-340B participants even if remedies take the form of a one-time blanket payment.

That concern explains why the Federation of American Hospitals (FAH), which represents for-profit hospitals, had lobbied the Supreme Court to uphold the lower payment rate for 340B drugs.

“Approximately 2,208 non-340B hospitals today benefit from the payment adjustment adopted by CMS in 2018,” FAH wrote in a March 2021 amicus brief.