Court Rules Against 340B Hospitals, Allows Medicare Reimbursement Cuts to Go Forward

On Friday, December 29, 2017, the U.S. District Court for the District of Columbia dealt a blow to hospitals participating in the 340B Drug Pricing Program. By participating in the 340B program, eligible public and not-for-profit hospitals receive significant discounts on the cost of acquiring outpatient prescription drugs. The court ruled in favor of the government’s motion to dismiss the lawsuit filed on behalf of those hospitals, which paves the way for the Centers for Medicare and Medicaid Services (CMS) to implement a final rule that would reduce Medicare outpatient prospective payment system (OPPS) reimbursement for separately payable drugs purchased by 340B hospitals by approximately 28 percent. Medicare reimbursement for drugs purchased under the 340B program has generally been higher than hospitals’ acquisition costs, allowing 340B hospitals to use the surplus to provide additional health care services to vulnerable populations. The reduced payment rates took effect as of January 1, 2018.

The Court’s Decision

The court granted the government’s motion to dismiss the lawsuit filed by a group of plaintiffs, including the American Hospital Association, America’s Essential Hospitals, and the Association of American Medical Colleges (the hospitals), challenging the nearly 28 percent reimbursement rate reductions and at the same time dismissed the hospitals’ motion for preliminary injunction to halt the government’s action to proceed with the final rule. The court concluded that it lacked subject matter jurisdiction because the hospitals failed to first present any claim to the Department of Health and Human Services (HHS) for final decision as required by section 205(g) the Social Security Act (42 U.S.C. § 405(g)).

In the litigation, the hospitals had argued that the agency exceeded its authority because its method for calculating the reimbursement rate was at odds with the methods required by statute. The hospitals also argued, as did commenters on the proposed rule, that the new Medicare reimbursement rates targeting 340B hospitals would undermine the intent of the 340B program and harm patients served by 340B covered entities.

The court did not reach this theory or the parties’ other underlying arguments, but instead found that it did not have subject matter jurisdiction to hear the case because the hospitals’ challenge was substantively based on the Medicare Act. Challenges arising under the Medicare Act must be brought under 42 U.S.C. § 405(g), which allows judicial review only after a claim for benefits has been presented to the Secretary, and all administrative remedies prescribed by the HHS Secretary are exhausted. The court noted that while ordinary administrative law doctrines might permit judicial review under various exceptions, the Medicare Act “demands the ‘channeling’ of virtually all legal attacks through the agency.”

The hospitals argued that their submission of “detailed comments during the notice-and-comment process for the 340B Provisions of the OPPS Rule” met the presentment requirement, but the court did not agree. The court found that comments during rulemaking are not “individualized, concrete claim[s] for reimbursement, as courts routinely require to satisfy presentment.” The court found that the hospitals could not meet the presentment requirement because “they have not yet presented any specific claim for reimbursement to the Secretary upon which the Secretary might make a final decision.”

The Road Ahead for 340B Hospitals

The December 28, 2017 decision represents a significant setback in 340B hospitals’ ability to challenge the Medicare payment reductions for 340B hospitals. The plaintiff hospitals may elect to appeal the decision in an attempt to reverse the conclusion that the court lacks subject matter jurisdiction to hear the claims. In addition, because the district court dismissed the case for lack of jurisdiction and did not reach the merits of the plaintiffs’ substantive arguments, 340B hospitals could submit a claim for Medicare OPPS payment under the new rules, and then petition for administrative review and relief. Any such claim would need to proceed through the administrative process before reaching a federal court. Lastly, 340B hospitals can continue to raise 340B policy issues with members of Congress. These efforts could result in changes to the Medicare OPPS reimbursement policy, potentially in combination with other changes to the 340B program.

In the meantime, 340B hospitals should be prepared to comply with the new Medicare OPPS requirements as soon as possible in order to avoid the submission of erroneous claims or delays in Medicare reimbursement. This includes compliance with new Medicare coding requirements for OPPS claims for separately payable drugs purchased under the 340B program with dates on or after January 1, 2018. To ensure that the appropriate modifiers are included on such claims, hospitals may need to work with their billing departments, pharmacy departments, and third party administrators involved with their 340B program to ensure that their claims can be timely processed and paid, even as they await potential future challenges to the Medicare payment rates.

We will continue to monitor any developments with the 340B program.

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