Federal Court Punts Regarding Remedy Related to CMS’ Invalidated Rule Concerning Medicare Hospital Outpatient Payment Rates for 340B Drugs

May 17, 2019By David C. Gibbons & Alan M. Kirschenbaum

On May 6, 2019, the United States District Court for the District of Columbia issued a Memorandum and Opinion concerning the remedy available to Plaintiffs following the same court’s earlier decision (see our previous post regarding the court’s earlier decision here) invalidating a final rule issued by the Centers for Medicare and Medicaid Services (CMS) that would have altered the methodology for Medicare hospital outpatient payment rates for 340B drugs. In accordance with D.C. Circuit precedent, the court remanded the matter to CMS to remedy the unlawful change to the 340B drug payment methodology under the final rule. See Am. Hosp. Ass’n v. Azar, No. 18-2084, 2, 22 (D.D.C. May 6, 2019).

As background, under the Social Security Act, CMS must set reimbursement rates for certain separately payable hospital outpatient drugs, including 340B drugs, under the Medicare Part B hospital outpatient prospective payment system (OPPS). Since 2005, CMS has set those rates based on average sales price (ASP) plus 6%. However, in 2017, CMS proposed to revise the reimbursement formula for 340B drugs effective January 1, 2018. Concluding that hospital Covered Entities profited too much from reimbursement for 340B discounted drugs, CMS reduced the payment amount for hospital outpatient separately payable 340B drugs to ASP minus 22.5%. The American Hospital Association (AHA) and various other hospital associations and non-profit hospitals submitted comments opposing this change to the calculation methodology, arguing that CMS was not authorized to make the change. Despite these comments, CMS asserted that it had the statutory authority to set the rate based on the average price for the drug “as calculated and adjusted by the Secretary” and finalized the rule.  The AHA, along with other hospital associations and non-profit hospitals, filed a lawsuit against CMS seeking to enjoin the final rule from further effect and to remedy the use of the unlawful payment methodology in determining 340B drug payments.

In its December 2018 ruling, the court granted Plaintiffs’ motion for a permanent injunction, holding that CMS had “fundamentally altered the statutory scheme,” thereby exceeding its authority to “adjust[]” the reimbursement rate. However, the court did not rule on the appropriate remedy for CMS applying the 2018 revised payment methodology rule. Among other relief, Plaintiffs sought a retroactive increase in payment rates for 340B drugs to ASP plus 6% for 2018. However, because of a statutory requirement that all OPPS payment rates be budget neutral, increasing hospital reimbursement rates for 340B drugs retroactively for 2018 would also require retroactive offsets in payments for other items and services paid under the Medicare program. Therefore, the court decided to postpone a decision on an appropriate remedy, ordering the parties to provide supplemental briefing on this issue.  In the meantime, CMS issued a rule to continue the ASP minus 22.5% payment rate reduction through 2019. 83 Fed. Reg. 58818, 58822 (Nov. 21, 2018). Plaintiffs supplemented their Complaint to petition the court to vacate both the 2018 and 2019 rules, order CMS to reimburse Plaintiffs for the difference in payments between the 2017 (i.e., ASP + 6%) and 2018/2019 (i.e., ASP – 22.5%) rates, and order CMS to use the ASP + 6% methodology for claims not yet paid. CMS, however, sought to have the 2018 and 2019 OPPS rules remanded to CMS without vacating them or imposing specific duties on CMS.

The court, in the May 2019 ruling, concluded that “[r]emand, rather than injunction is the better course of action here.” The court cited to numerous precedential cases in the D.C. Circuit where, upon setting aside unlawful agency action, the agencies were given the initial task to fashion an appropriate remedy. In fact, the D.C. Circuit has held that a district court order to an agency to take specific action in such circumstances is reversible error. The court also noted that Plaintiffs have the option to seek judicial review of an agency’s remedy if they are not satisfied with it.

In deciding whether to remand or vacate the 2018 and 2019 OPPS rules, the court applied the Allied-Signal standard in which the court must weigh the seriousness of the agency’s deficiencies against the disruptive consequences of vacating the agency’s action. Id. at 16 (citing Allied-Signal, Inc. v. U.S. Nuclear Regulatory Comm’n, 988 F.2d 146, 150-51 (D.C. Cir. 1993). On the one hand, the court found that CMS’s “deficiencies here were substantial” and that CMS “patently violated the Medicare Act’s text.” But, on the other hand, vacating the 2018 and 2019 OPPS rules would be “highly disruptive,” given the budget neutrality requirement. Vacating the 2018 and 2019 OPPS rules would likely require CMS to retroactively recoup payments made to providers for non-drug items and services whose rates were increased because of the reduction in reimbursement rates for drugs; CMS estimated that to recoup such payments would take a year and result in administrative costs between $25 and $30 million. Furthermore, retroactive recoupment would also negatively affect Medicare beneficiaries because of the impact on amounts they paid under their cost-sharing obligations during that period. In addition, the court noted that the Plaintiffs themselves conceded that there were multiple ways CMS could remediate the underpayments for drugs under the violative 2018 and 2019 OPPS rules. Finally, the court determined that “no amount of reasoning on remand will allow [CMS] to re-implement the 340B rates in the same manner” as the unlawful 2018 and 2019 OPPS rules. For these reasons, the Court granted, in part, the Plaintiffs’ motion for permanent injunction and ordered the parties to submit, by August 5, 2019, a status report on the progress to remedy the unlawful payment methodology implemented by CMS in 2018 and 2019.

We will continue to track developments in this case.