Federal District Court Rules HHS Cuts to 340B Reimbursement 'Exceeded' Authority

January 8, 2019Legal Alerts

In a recent opinion out of the U.S. District Court for the District of Columbia, U.S. District Court Judge Rudolph Contreras held that the U.S. Department of Health and Human Services (HHS) exceeded its authority when it substantially reduced the amount Medicare pays for 340B-acquired medications.[1] Specifically, the district court held that while Congress authorized HHS to make certain “adjustments” to Medicare Part B drug reimbursement rates, HHS’s 340B-related adjustments “fundamentally altered” Congress’ mandate that HHS pay for 340B medication at a statutorily prescribed benchmark.[2] According to the district court, HHS exceeded its price adjustment authority when it enacted stringent cuts to Medicare payment for 340B acquired drugs. Judge Contreras’ opinion has been celebrated as a “victory for law and common sense”[3]; however, the issue is far from resolved.

Beginning in mid-2017, HHS cut Medicare Part B reimbursement rates for 340B acquired drugs from the usual rate of Average Sales Price (ASP) plus 6 percent to ASP minus 22.5 percent.[4] HHS’s cuts reduced 340B reimbursements by nearly 30 percent (equaling an estimated $1.6 billion) for 340B covered entities paid through the Medicare OPPS or the Ambulatory Surgical Center payment systems, except for rural sole community hospitals, children’s hospitals, and PPS-exempt cancer hospitals. Citing the financial savings realized through the 2017 cuts, HHS then expanded the 340B cuts in 2018 to include all off-campus provider-based departments of affected 340B covered entities.[5] Fearing the effects of this potentially significant loss of revenue, the AHA and other hospital associations filed suit against HHS on November 13, 2017, in an attempt to block the payment reductions.

Specifically, the claims levied by the plaintiffs against HHS focused on the statutory language that authorizes HHS to make payments for Medicare Part B drugs, regardless of 340B status, at the “average price for the drug set forth in 42 U.S.C. 1395w-3a. . . as calculated and adjusted by HHS as necessary.”[6] The plaintiffs argued this language set a specific rate HHS is required to pay for all covered medications while acknowledging HHS could make minor adjustments to this rate as necessary. However, relying on the district court’s opinion in Amgen, Inc. v. Smith, 357 F.3d 103 (D.C. Cir. 2004), the plaintiffs further argued HHS cannot use its adjustment authority to make dramatic adjustments that do not ensure equitable payment to Medicare providers.[7]  Conversely, HHS took the position that Congress provided it with plenary authority, whereby HHS could raise or lower reimbursement rates in its sole discretion and take into account a drug’s 340B acquisition price.

Siding with the plaintiffs, the district court held that, although Congress specifically authorized HHS to adjust Medicare reimbursement rates in its discretion, HHS could not use this authority in a manner that fundamentally changed Medicare’s statutory scheme.[8] As such, the district court held that HHS exceeded its statutory authority by enacting price cuts that were not merely adjustments.[9]

Although the district court’s opinion clearly states HHS exceeded its statutory authority by imposing the 340B payment cuts, it does not vacate HHS’s 340B reimbursement rule nor does it impose a specific remedy to compensate 340B covered entities for their losses. Rather, due to the complexity of Medicare’s rate setting requirements, the opinion orders HHS and the plaintiffs to file supplemental briefs by January 27, 2019, in order to assist the district court in fashioning an appropriate remedy.[10]

In this context, the Medicare statute requires HHS to carry out its Medicare-related payment functions in a budget-neutral manner. For example, if HHS increases payment for certain Medicare Part B items or services, it must offset the increase by reducing payments for other items or services. In this case, HHS’s 340B reimbursement cuts were accompanied by an approximate 3.2 percent increase in OPPS payments for non-drug items and services.[11] As a result, resolution of the case will be difficult and could involve complicated remedial measures, including requiring the resubmission of claims to HHS, reductions in reimbursement for non-drug items or services or a combination of these and other measures. Further, it is unclear whether HHS must return to the 2017 payment rules preceding the 340B cuts or if the district court will require another more appropriate remedy.

Interestingly, the district court did not provide guidance as to how 340B covered entities are to operate going forward. For example, HHS’s rule enacting the payment cuts requires covered entities to include modifier “JG” on all 340B claims.[12] Under the district court’s ruling, it is unclear whether the modifier requirement was within HHS’s authority and the requirement survives. Additionally, because the district court’s decision was not stayed pending appeal, HHS is currently prohibited from enforcing the cuts and is not required to reimburse 340B covered entities in accordance with rules pre-dating the cuts.  Rather, because the district court requested the parties brief the district court on the proper scope and extent of relief, 340B stakeholders and HHS must navigate an unclear Medicare reimbursement environment without clear guidance.    

Lastly, it is unclear how covered entities affected by HHS’s payment cuts will be compensated for their losses now that the cuts have been invalidated. For instance, if a covered entity chose to acquire and dispense non-340B medications in lieu of 340B medications subject to HHS’s cuts, can the entity be fairly compensated for its losses? Further, if a covered entity used a contract pharmacy to dispense Medicare-covered 340B medications, must the covered entity make an additional payment to its contracted pharmacy?

Regardless of whether HHS appeals the district court’s decision, HHS and affected 340B stakeholders face a uniquely difficult problem. If your organization participates in the 340B program or was impacted by HHS’s cuts to 340B payments, please contact a Dinsmore health care attorney for more information.


[1] See, The American Hospital Association, et al. v. Alex M. Azar II, United States Secretary of Health and Human Services, et al., 2018 U.S. Dist. LEXIS 216647, 2018 WL 6807219 (D.D.C. 2018).

[2] Id. at 28.

[3] https://twitter.com/OurHospitals/status/1078673625392263768.

[4] See, 82 Fed. Reg. 52356, 52362. 

[5] See, 83 Fed. Reg. 58818 (please see Dinsmore & Shohl, LLP’s previous discussion about HHS’s reimbursement cuts here: https://www.dinsmore.com/publications/cms-extends-medicare-part-b-340b-drug-reimbursement-policies/).

[6] The American Hospital Association, et. al, 2018 U.S. Dist. LEXIS 216647 at 8.

[7] See, Amgen, Inc. v. Smith, 357 F.3d 103, 106 (D.C. Cir. 2004) (holding that HHS’s adjustment authority does not provide it absurdly broad power to make dramatic adjustments that undermine the Medicare statutory scheme.).

[8] The American Hospital Association, et. al, 2018 U.S. Dist. LEXIS 216647 at 28.

[9] Id. at 29.

[10] Id. at 36.

[11] 82 Fed. Reg. 52356, 52509-10. 

[12] Id.