Commencing Jan. 1 this year, non-exempt 340B covered entities reimbursed under the Medicare Outpatient Prospective Payment System (“OPPS”) started receiving nearly 30 percent less in reimbursements for prescription medication purchased through the 340B discount drug program. The payment reduction, imposed under the Centers for Medicare and Medicaid Services’ (“CMS”) 2018 OPPS final rule, is the subject of ongoing litigation instituted by the American Hospital Association, various hospital groups and individual 340B hospitals, seeking to enjoin its continued implementation.

Meanwhile, debate regarding the future of the 340B discount drug program has intensified on Capitol Hill, with competing bills vying for passage, and interest groups—most visibly, PhRMA, safety net hospital advocacy groups and the Community Oncology Alliance—jockeying for favorable legislative treatment and flooding editorial pages across the country.

While 340B hospitals contend that the differential between full OPPS reimbursement and the acquisition cost of drugs eligible for a 340B discount is critical to continued funding of programs that benefit the indigent and uninsured, PhRMA counters that the 340B program has been over-extended, provides limited benefit to the most vulnerable, and drives higher drug prices for all other consumers. PhRMA endorses restrictions on the scope of the 340B program and enhanced monitoring to ensure that the program benefits the needy. For their part, community oncologist groups complain that, among other issues, reduced drug prices available to outpatient infusion centers operated by 340B hospitals unfairly confer an insurmountable competitive advantage to such hospitals.

Litigation Ensues

The most notable recent development in what can only be described as a tumultuous 2018 for the 340B program was the filing by the hospital plaintiffs on April 2 of a reply brief in a pending appeal of a district court ruling dismissing their action to enjoin CMS’s 340B payment reduction. Following a Dec. 29, 2017, order by the United States District Court for the District of Columbia in Am. Hosp. Ass’n v. Hargan, D.D.C., No. 1:17-cv-2447, 2017 BL 465935, which dismissed the lawsuit on jurisdictional grounds, the plaintiffs appealed to the U.S. Court of Appeals for the District of Columbia Circuit, which promptly granted the plaintiffs’ request for an expedited appeal schedule. The filing of the reply brief follows the submission on Feb. 15 of the plaintiffs’ appellate brief, a Feb. 22 amici curiae brief of 35 State and regional hospital associations and the filing of the government’s appellate brief on March 19.

In their moving brief, the plaintiffs contend that the district court erred in dismissing their action as premature and that their continuing incurrence of actual damages following the Jan. 1 payment reduction’s effective date weighs heavily in favor of preliminary injunctive relief. More specifically, they argue that the OPPS final rule is causing irreparable injury to the plaintiffs “by jeopardizing essential programs and services provided to their communities and the vulnerable, poor and other underserved populations, such as oncology, dialysis, and immediate stroke treatment services.”

The plaintiffs contest the district court’s finding that they failed to “present” their claim to the Department of Health and Human Services (“HHS”), as required by the Social Security Act, asserting that their extensive comments challenging the legality of the payment reduction submitted during the OPPS rule comment period—which comments were addressed and rejected by the HHS Secretary in the OPPS final rule—satisfy the “presentment” standard. In reaching this conclusion, the plaintiffs reason that the comment period “was the only meaningful forum for presenting Plaintiffs’ position because once HHS issued the final regulation, no agency official could give Plaintiffs relief from the new reimbursement rate.”

Authority Exceeded

On the merits, the plaintiffs argue that the HHS Secretary’s near-30 percent rate reduction constitutes an improper exercise of his statutory rate-setting authority:

  • Under that authority, HHS must base the rate on acquisition costs if it has certain data specifically identified in the statute. If it lacks that data, the statute provides that the reimbursement rate is the average sales price of the drug (“ASP”) plus 6% to account for overhead and related costs—a rate the statute authorizes the Secretary to “adjust[] as necessary for purposes of this paragraph.” Here HHS acknowledged that it lacked the data required to use acquisition cost, but attempted to end-run the statutory requirement by adopting an acquisition-cost based rate in the guise of an “adjustment” to the ASP plus 6% statutory rate.

Additionally, the plaintiffs complain that the HHS Secretary’s limited statutory “authority to adjust the ASP or overhead cannot be used to make significant changes to the 340B Program, which is not part of the OPPS system and therefore not the subject of an ‘adjustment as necessary’ under that system.” In framing this argument, they reference Congress’s oft-cited purpose for creating the 340B program: “to stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” The plaintiffs then quote the Health Resources and Services Administration (“HRSA”), the HHS agency responsible for administering the 340B program, in support of their premise that the Secretary’s action undermines the fundamental structure of the 340B program:

  • As explained by [HRSA] . . ., the [340B] Program furthers this legislative purpose by “lower[ing] the cost of acquiring covered outpatient drugs” from drug manufacturers, thereby generating additional resources from “health insurance reimbursements” —including reimbursements under Medicare—that are “maintained or not reduced as much as the 340B discounts or rebates.” In other words, under the Program, 340B hospitals receive insurance reimbursements, including from Medicare, that exceed the discounted price paid by these hospitals to drug manufacturers. These increased resources, in turn, enable 340B hospitals to deliver programs and services to serve their communities, including vulnerable populations in those communities.

By contrast, the government’s brief rests primarily on jurisdictional arguments, specifically that: (1) the Medicare Act precludes judicial review of OPPS rate-setting activities by the HHS Secretary; (2) the district court correctly held that the plaintiffs’ submission of comments did not satisfy the presentment requirement of 42 U.S.C. §405(g); and (3) that the plaintiffs have not exhausted administrative remedies as required under that section.

No Judicial Review ... Yet

The government contends on its first point that 42 U.S.C. §1395l(t)(12) “precludes both administrative and judicial review of agency decisions concerning the Secretary’s administration of the [OPPS], including adjustments to payment rates for covered outpatient services such as 340B drugs at issue here.” The government cites to D.C. Circuit precedent, Amgen Inc. v. Smith, 357 F.3d 103 (D.C. Cir. 2004), to explain Congress’s purported rationale for such preclusion – that “[P]iecemeal review of individual payment determinations could frustrate the efficient operation of the complex prospective payment system.” The government argues that this concern is particularly acute with respect to the 340B payment reduction, because, in order to achieve budget neutrality, the HHS Secretary in the final rule adjusted OPPS payments for services upward to offset the drug reimbursement reductions. Accordingly, argues the government, the difficulty of unscrambling the egg that was cracked and whisked upon implementation of the OPPS final rule necessitates preclusion because “[i]f a court were to invalidate the adjustment at issue here, it would . . . also [impact] the payment rates for services across the OPPS classification system, and would likely require CMS to recalculate payments made under other OPPS payment rates in order to preserve budget neutrality.”

The government concludes its preclusion argument by observing that the 340B payment reduction does not fall within §1395l(t)(12)’s narrow exception permitting judicial review of agency action that is ultra vires, reasoning that the HHS Secretary’s “statutory authority to ‘adjust[]’ OPPS payment rates ‘as necessary’ under subsection 1395l(t)(14)(A)(iii)(II) is unequivocal, and not subject to any express statutory limitation.” Distinguishing the present circumstances from the D.C. Circuit’s holding in Amgen that “[l]imitations on the Secretary’s equitable adjustment authority inhere in the [statutory] text . . . which only authorizes ‘adjustments [to OPPS payment rates],’ not total elimination or severe restructuring of the statutory scheme”, the government contends that the 340B payment reduction—which it claims was imposed to “better, and more appropriately, reflect the resources and acquisition costs that [340B] hospitals incur” —does not eliminate or severely restructure the 340B statutory scheme. Rather, the government asserts, in setting the ASP minus 22.5% reimbursement rate, the HHS Secretary chose a “conservative” number in order “to ensure both that beneficiaries ‘share in the savings on drugs acquired through the 340B Program’ and also that 340B providers would ‘retain profit on these drugs.’”

On presentment and exhaustion of administrative remedies, the government argues that the plaintiffs’ action does not fall within any exception to the statutorily prescribed administrative review process and must therefore be channeled through HHS before it is eligible for judicial review.

Preclusion Debated

The plaintiffs’ reply brief, filed April 2, focuses primarily on refuting the government’s preclusion argument, delving deeply into the statutory structure to advance an interpretation that carves out the HHS Secretary’s 340B reimbursement reduction from the provision shielding certain other actions from judicial review under the Medicare Act.

Plaintiffs’ further underscore their contention that the HHS Secretary exceeded his authority to “adjust” OPPS reimbursement because: “Adjusting average sales price based on acquisition cost data to reach a rate that more closely aligns with the average acquisition cost for certain 340B drugs in order to correct perceived deficiencies in the 340B program exceeds the [HHS Secretary’s] authority to adjust average sales price as defined” in the relevant statutory language.

The plaintiffs also assert in their reply that, even assuming that comments filed during the rulemaking process did not constitute “presentment” of their claims, this deficiency has since been cured. In support, the brief notes that following the district court’s December 29, 2017 order, three hospital plaintiffs “submitted reimbursement claims, received reduced payments under the new rate, and sought redetermination of the payment amount based on the alleged illegality of the new rate, and [that] one Hospital Plaintiff, Henry Ford, has already had its redetermination requests denied” by HHS. Plaintiffs conclude that further pursuit of such claims through administrative channels is futile, arguing that HHS’ statements in separate litigation confirm that “hospitals’ efforts to obtain administrative review of the new rate [for 340B-acquired drugs] will be dismissed without consideration.”

No Budgetary Constraint

Finally, the plaintiffs rebut the government’s contention that a ruling requiring CMS to recalculate payments would result in budgetary chaos, observing that “OPPS reimbursement rates are revised annually, and in any given year HHS can set future rates at a level needed to retroactively correct mistakes in past years’ rates.” The plaintiffs explain that HHS has taken such action as recently as last year, in connection with adjustments relating to HHS’s “two-midnight” policy.

The plaintiffs’ challenge in this action to HHS’ broad interpretation of its rate-setting authority has potentially momentous implications beyond just reversing the 340B payment reduction. In the event that the plaintiffs prevail, HHS’s freedom to substantially adjust reimbursement rates in the absence of statutorily prescribed actual acquisition cost data would be significantly cabined, requiring congressional action for the type of policy upheavals that HHS seeks to achieve through the 340B payment reduction.

However the D.C. Circuit rules on the appeal, the outcome undoubtedly will produce more urgent calls for legislative reform from a variety of impacted stakeholders.

Oral arguments in this appeal are scheduled for May 4th.

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Justin C. Linder, Of Counsel at Dughi, Hewit & Domalewski, P.C. in Cranford, N.J., is a seasoned life sciences and healthcare attorney with deep experience representing biopharmaceutical organizations, health systems, academic medical centers, integrated delivery networks and a variety of other healthcare entities. As former Associate General Counsel for a Disproportionate Share Hospital, he managed the entity’s 340B program, and is a recipient of an Advanced 340B Operations Certificate. Justin also provides practical regulatory and compliance counsel, specializing in state and federal fraud, abuse and privacy laws. He can be reached at jlinder@dughihewit.com or (908) 272-0200.