Executive Summary

Siding with coalition of hospitals, judge ruled that HHS lacked authority to cut Medicare reimbursement for drugs purchased at 340B prices. That should change the dynamics of the 340B reform debate heading into 2019 – but don’t expect the Trump Administration to back down on its push to rein in what it sees as abuses of the discount.

The US Department of Health & Human Services and a coalition of hospitals have about six weeks to prepare arguments for how to restore Medicare Part B payments for drugs purchased using the 340B discount program after a federal court ruled that HHS lacked the authority to set the reduced payment rate currently in effect.

On Dec. 27, Judge Rudolph Contreras ruled in favor of the American Hospital Association, America’s Essential Hospitals, and the Association of American Medical Colleges in a lawsuit challenging the 2018 Medicare Part B Hospital Outpatient Prospective Payment System policy of paying a much lower rate for drugs purchased at 340B prices: average sales price minus 22.5% rather than the statutory standard of ASP+6%. (Also see “Medicare Lowers Payments For 340B Drugs: Promising Sign For Further Reform?” – Pink Sheet, 2 Nov, 2017.)

Contreras ruled that HHS lacked the statutory authority to implement the cut and issued a permanent injunction against the rule. That is a clear win for the hospitals, but the immediate impact is not clear.

The permanent injunction relates solely to the 2018 OPPS rule; it does not in and of itself change the Centers for Medicare & Medicaid Services 2019 final OPPS rule, which maintains the ASP-22.5% payment rate. (Also see “US Reimbursement Briefs: Medicare Payments For New Drugs; 340B Rules; HHS’ Best ” – Pink Sheet, 2 Nov, 2018.)

Another Lawsuit May Be Required For 2019 Reg

The exclusive focus on 2018 is a function of the judge’s determination that the plaintiffs only have standing to sue HHS over a payment rule if they can present evidence of a denied claim. Thus, the hospitals would in theory have to bring new litigation to overturn the 2019 rule once a claim is submitted and denied.

However, Contreras appears to be using the discussion of remedies in the current case to set the stage to resolve the payment issue going forward.

In the lawsuit, AHA et al. requested that the judge vacate the rule and restore the standard, ASP+6% payment formula for 340B drugs immediately. Contreras acknowledged that the typical remedy in a case challenging the legal basis of a regulation is to vacate the rule, but noted that doing so with just four days left in the year would have minimal impact.

More importantly, the hospitals asked the court to order retroactive payment of claims at the full rate. Contreras made clear in his ruling that he is skeptical of the wisdom or practicality of attempting a retroactive fix.

Hospitals Might Not Get Their Money

An order for retroactive changes to Part B payments would be “likely to be highly disruptive,” Contreras noted, given that the entire OPPS rule is supposed to be budget neutral and thus the payment cuts for 340B drugs were reallocated to other Part B reimbursements.

“The retroactive OPPS payments that Plaintiffs seek here would presumably require similar offsets elsewhere; a quagmire that may be impossible to navigate considering the volume of Medicare Part B payments made in 2018,” Contreras noted.

Rather than issuing a final ruling, however, Contreras ordered additional briefing on the subject, presumably with an eye towards achieving a negotiated settlement that resolves the issue for 2019 and beyond. Contreras gave both parties 30 days to submit briefs on the potential approaches for remedies and an additional 14 days to respond to the opposition brief. That suggests a mid-February timeline for substantive proceedings to resume – and for attention to turn to whether and how to address the 2019 rule as well.

Trump Administration Likely To Continue Reform Push

The 340B payment policy was proposed under former HHS Secretary Tom Price and framed as part of the drug pricing response because the reimbursement cut would lower co-payments for Medicare Part B beneficiaries. The policy does not directly affect drug company prices or profits; it simply reduces how much hospitals who purchase at the discounted rate are paid by Medicare for administering those products.

Nevertheless, the biopharma industry was enthusiastic about taking some of the perceived incentives out of the discount program. Moreover, the payment cut became a significant bargaining chip to try to encourage hospitals to engage in discussions over 340B reform legislation. (Also see “Breaking 340B: What Happens After Medicare Payment Cut?” – Pink Sheet, 11 Jan, 2018.)

The policy was finalized after Price resigned but before Alex Azar was confirmed as his successor. Azar embraced the policy during a subsequent appearance at the 340B coalition conference in Washington D.C. (Also see “Penny For Your Thoughts? HHS Secretary Azar’s Blunt Words For 340B Providers” – Pink Sheet, 12 Jul, 2018.)

Azar, however, has moved forward to finalize a separate 340B policy supported by purchasers (the ceiling price calculation rule) and dropped a Price-initiated effort to revisit the so-called “penny pricing” policy. It will be interesting to watch whether he views the 340B payment cut as worth pressing given the adverse decision – and the incoming Democratic House majority, which will be far more supportive of the purchaser community.

That said, the Trump Administration is unlikely to abandon its efforts to curtail the 340B drug discount program, and the ruling could turn out to be a catalyst for advancing alternative approaches.

During the Prevision Policy/Friends of Cancer Research Biopharma Congress held the week after the November elections, the top health official in the White House Office of Management & Budget, Joe Grogan, suggested more administrative reforms of 340B would be forthcoming.

“You should expect more on 340B,” he said. “It is program that is being abused and it needs to be addressed. It would be ideal if it was addressed legislatively but it is going to have to be addressed from a regulatory perspective, from an administrative management perspective.”

He also defended the payment cut and even suggested that there are stakeholders in the 340B community who are ready to come to the table to “right-size” the program.

“In conversations I’ve had with institutions that have benefited from 340B over the years, they recognize that the program has gotten out of whack and are willing to have a discussion about how to right-size it,” Grogan said. The goal should be to “get it back to its original purpose, which is to help hospitals that are helping the poor deliver health care to them – and not an opportunity to pad certain institutions’ wallets.”

“It also creates an incredible distortion in the market that needs to be made up somewhere,” Grogan added. “It has to be addressed.”

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