CMS Prevails in Litigation Challenging Pricing Policy for 340B Drugs

We’ve written before about the 340B program, which allows some health service providers that treat low-income patients to purchase outpatient prescription drugs at  deeply discounted prices.  It’s related (at least tangentially) to our blog because of the link between the 340B program and the manner in which the Medicaid program pays for outpatient drugs; essentially, the price that a 340B covered entity pays for a drug is the price that Medicaid would pay for the drug when it’s dispensed to a Medicaid patient:  at least 23.1% off of the manufacturer’s price of the drug.

In the past couple of years, my colleagues Ross Margulies and Erik Schulwolf have told you (here and here) about a lawsuit filed by the American Hospital Association against CMS challenging a new payment methodology that the agency uses to reimburse 340B hospitals for drugs that they acquire under the program.  The CMS policy affects Medicare payments to hospitals, not Medicaid.  In a big development last week, the U.S. Court of Appeals for the D.C. Circuit upheld the CMS policy, and struck down a lower court decision that had invalidated it.  If this decision remains in effect, and CMS retains its policy, 340B hospitals will continue to see reduced reimbursement for drugs used in the outpatient setting.

Here’s the public policy dilemma that CMS is trying to solve in its payment policy:  let’s say that a 340B hospital acquires a drug for $1,000.  The Medicare reimbursement amount for that drug might be $1,400.  When the hospital uses the drug when treating a patient, it bills Medicare (and the patient, who has to pay cost sharing) a total of $1,400 and is able to keep the $400 difference.  The combined amount paid by Medicare and the patient have far exceeded the hospital’s cost in acquiring the drug.

The CMS policy was an attempt to partially recapture the $400 in the example above.  In 2018, CMS announced that, going forward, the Medicare program would reimburse 340B hospitals for drugs acquired under the 340B program at the average sales price of the drug, minus 22.5%.  In our example above, that means that the hospital would receive $1,085 ([1 – .225] * $1,400) for the drug, not $1,400.  CMS used the money saved by the policy and distributed it across all hospitals.

As you might imagine, 340B hospitals objected to this policy and filed a lawsuit to challenge it.  As a policy matter, the hospitals noted that 340B hospitals treat the poorest patients.  In order to qualify for the 340B program, a hospital has to treat a disproportionate share of low-income patients.  These are often inner-city hospitals, in poor communities, that are a vital lifeline to a socially-marginalized and disadvantaged population.  Yes, the hospitals acknowledged, they are paid more than their costs in using drugs to treat their patients, but those excess funds are used to provide additional services to marginalized communities.  For example, one 340B hospital told CMS that the only reason it is able to keep its dialysis clinic operating is because of the profit it makes on 340B drugs.  If that hospital couldn’t operate its dialysis clinic, kidney disease patients might have to travel 50 miles to receive dialysis three times per week, rather than stay in their community.

As a legal matter, the hospitals pointed to the wording of the Medicare outpatient reimbursement statute, which specifies two potential methodologies for reimbursing for drugs used in the outpatient setting:  under method 1, the hospital is paid at its acquisition cost for the drug, based on a survey of acquisition costs.  Under method 2, the hospital is paid the average sales price subject to CMS-determined “adjustments.”  Because CMS stated that it was attempting to pay hospitals for 340B drugs at an amount closer to their acquisition cost, the hospitals argued that CMS was mandated to use method 1, as informed by the data survey, and was not permitted to use method 2, which allows for the use of “adjustments.”

Although the court said that the hospitals’ argument was “not without force,” it was ultimately unpersuaded.  An Executive Branch agency has significant discretion in interpreting the words of a statute, and the court said that it could not conclude that CMS was “unambiguously barred” from using method 2 as the agency had done.  The court also rejected another argument raised by the hospitals:  that a reimbursement cut of 22.5% for outpatient drugs was not an “adjustment” at all, but rather a significant reimbursement cut.  An “adjustment,” according to the hospitals, would yield a minor change in payment, not one of nearly one-quarter of the price of the drug.  But the court didn’t buy this argument, either.

One procedural issue:  at the outset, the government argued that the court lacked jurisdiction to hear the case at all, because Congress had precluded judicial review of some aspects of the outpatient payment system.  The court rejected the government’s argument on this point, concluding that Congress had not blocked review of the “method 1/method 2” reimbursement policy under which CMS had acted.  Interestingly, another aspect of the outpatient payment system does give CMS authority to make “other adjustments as determined to be necessary to ensure equitable payments,” and that provision is shielded from judicial review.  But that was not the justification that CMS chose to adopt for its policy.

The payment cuts have remained in effect during the pendency of the litigation, and CMS is likely to keep them in effect for the 2021 payment year as well.  It’s important to note that the court decision does not mean that CMS is compelled to maintain its policy; the court merely held that the policy is legally permissible.  A new Administration could direct CMS to change the policy, and Congress could also overturn it.  From the court’s perspective, that is a decision for the politically-accountable branches of government to make.

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