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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 have 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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In a striking blow to 340B hospitals, the Department of Health and Human Services, Centers for Medicare and Medicaid Services (CMS) released a final Medicare Outpatient Prospective Payment System (OPPS) rule adopting its earlier proposal to significantly reduce Medicare reimbursement for separately payable outpatient drugs purchased by hospitals under the 340B program. The final rule confirms that CMS will drop the reimbursement rate from the average sales price (ASP) plus 6 percent to ASP minus 22.5 percent. The payment changes are scheduled to take effect on January 1, 2018.
Citing the large growth in provider participation in the 340B Program and the increasing prices for drugs administered under Medicare Part B to hospital outpatients, CMS’ stated goal is to align Medicare payment with the amounts hospitals are actually spending to acquire the drugs. CMS relied on a May 2015 Medicare Payment Advisory Commission (MedPAC) Report to Congress to determine the new formula. While MedPAC estimated that the ASP minus 22.5 percent figure that CMS ultimately adopted was the “lower bound of the average discount” on drugs paid under the Medicare OPPS, MedPAC’s March 2016 Report to Congress recommended a reduction in payment to ASP minus 10%, which would have allowed 340B hospitals to realize, on average, a financial benefit for participating in the 340B program.
The Financial Impact of the Changes to 340B Hospitals
The OPPS changes will have a significant impact on 340B participating hospitals. CMS estimated that the change will result in a $1.6 billion reduction in OPPS payments to 340B hospitals for separately payable drugs—an additional estimated reduction of $700 million over the $900 million estimate from the proposed rule. While CMS had requested comments in the proposed rule on how to redistribute the savings to target hospitals that treat low-income patients, the final rule instead redistributes the amounts saved by the 340B payment reductions by increasing OPPS payments for non-drug services
CMS is exempting rural sole community hospitals, children’s hospitals, and PPS-exempt cancer hospitals from the new drug payment reductions for calendar year 2018; they will continue to be paid at ASP + 6%. The exempted hospitals will need to report 340B utilization to Medicare for information and tracking purposes.
Litigation is Expected
The changes to Medicare payment are likely to be challenged in court by one or more groups of stakeholders, including the American Hospital Association. In comments submitted on the proposed rule, multiple groups contended that CMS lacks authority to implement such large payment changes or to single out 340B hospitals for reductions, and may not otherwise contravene the intent and scope of the 340B Program without further Congressional action. These challenges will likely play out in courts as CMS implements the new rule and while Congress continues to debate the future of the 340B Program.
No Impact on Non-Excepted Hospital Outpatient Departments
The changes to Medicare’s reimbursement also create new incentives for off-campus hospital outpatient departments(HOPD). Since January 1, 2017, new off-campus hospital outpatient departments that do not fall within an exception (non-excepted HOPDs) are not eligible for payment under the OPPS, and instead receive a reduced reimbursement rate. CMS has confirmed in the final rule that the new payment reductions for 340B drugs will not be applied to non-excepted HOPDs, as their drugs are not reimbursed under OPPS. As a result, the use of 340B drugs by a non-excepted HOPD will not impact the HOPD’s Medicare reimbursement.
In light of the new rule, 340B hospitals should prepare to come into compliance, which will require the use of a new modifier on each drug billed to Medicare OPPS that was purchased under the 340B Program. In some cases, this will require greater coordination between the hospital’s billing and pharmacy divisions to ensure the modifier is accurately applied.
We will continue to monitor the 340B Program and will update you on any further changes that may arise.
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The Centers for Medicare and Medicaid Services (CMS) has proposed reducing the Medicare payment rate to hospitals for most separately payable drugs purchased under the 340B program from average sales price (ASP) plus six percent to ASP minus 22.5%. This reimbursement cut — almost 30% in the aggregate— would significantly reduce the savings available to 340B participating providers. The eventual impact could be even greater if private insurers react by following Medicare’s example and reducing drug payments to 340B participating hospitals. No changes have been proposed for 340B covered entities that are not hospitals.
What Does the Proposed Rule Mean for Hospitals?
Currently, all hospitals other than critical access hospitals are paid the ASP-plus-six-percent rate for separately payable drugs under the Medicare hospital outpatient prospective payment system (OPPS). The rate does not vary based on participation in the 340B program. The proposed rule would require hospitals to identify, through a new modifier, when a drug was not purchased under the 340B program; in the absence of the modifier, CMS would presume that separately payable drugs had been acquired under 340B and pay ASP minus 22.5%. The payment reduction would not apply to drugs on pass-through status or vaccines.
What are the Broader Implications for the 340B Program?
The proposed Medicare change could spell trouble for 340B covered entities if it signifies support for further changes to limit the scope of the 340B program. In explaining the proposal, CMS stated its concern about “the growth in the number of providers participating in the 340B program and recent trends in high and growing prices of several separately payable drugs administered under Medicare Part B to hospital outpatients.” CMS also indicated dissatisfaction with high beneficiary copayments, which are set at 20% of the Medicare payment rate.
CMS determined the new rate based on the estimate in a 2015 MedPAC report to Congress that, on average, hospitals in the 340B program receive a minimum discount of 22.5% off the ASP for drugs paid under the OPPS. In the past, MedPAC has recommended to Congress more modest Part B drug payment cuts to hospitals for 340B drugs of 10 percent. CMS noted this previous MedPAC recommendation—as well as alternative proposals by the Office of Inspector General (OIG) to share 340B savings between Medicare and providers—without fully explaining why it was instead proposing a more aggressive payment cut.
Comment Period is Now Open
CMS has requested comments on the proposal by September 11, 2017. The agency has asked in particular for feedback on the analysis in the 2015 MedPAC report, whether the payment change should be phased in over time, whether exceptions should be established for certain hospitals or drugs, and whether CMS should apply all or part of the savings generated by the payment reduction to payment increases that target hospitals that treat a large share of indigent patients. Given the significant financial impact that this change would have on 340B participating hospitals, it would benefit participating providers to communicate to CMS how the change would impact their ability to deliver care to the low-income and underserved populations that the 340B program is designed to benefit.
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The Federal Office for Management and Budget has withdrawn the proposed omnibus guidance for the 340B Drug Pricing Program (previously referred to as the “Mega-Regs”), creating further uncertainty in the 340B Program. The guidance was proposed in the Fall of 2015, and would have updated all areas of 340B Program guidance. The guidance would have included significant changes to the definition of an eligible patient, and to 340B Program integrity provisions. By withdrawing the guidance, the Office of Management and Budget indicates that omnibus guidance will not be adopted as it was proposed. The new administration could issue new guidance that differs materially from the previous proposal. The withdrawal of the omnibus guidance coincides with a meeting between the President and the heads of major pharmaceutical companies.
As a result of court cases limiting the scope of the administration’s ability to issue regulations that have binding legal effect with regard to many aspects of the 340B Program, the new administration will need to evaluate the scope and intended effect of any forthcoming guidance. Until such time as guidance is finalized and adopted, 340B Program covered entities and drug manufacturers should continue to rely on the historical guidance.
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HRSA Announces Final Rule on Civil Monetary Penalties for Drug Manufacturers that Overcharge 340B Covered Entities
A new regulation issued by the Health Resources and Services Administration (“HRSA”) sets forth a process by which civil monetary penalties may be imposed on drug manufacturers that knowingly and intentionally charge 340B covered entities for covered outpatient drugs more than the statutory ceiling price. The regulation addresses the ceiling price calculation for drugs purchased pursuant to the 340B Drug Pricing Program (“340B Program”), and provides that drug manufacturers may be subject to a civil monetary penalty of up to $5,000 for each instance of overcharging. The regulation finalizes a proposal dating back to June 2015. The regulation will be enforced beginning on April 1, 2017.
The civil monetary penalties would not be calculated and imposed by HRSA’s Office of Pharmacy Affairs, but by the Office of Inspector General (“OIG”). The civil monetary penalties would be in addition to any refunds to covered entities that may be required by the 340B Program. The final rule does not provide a mechanism for covered entities to file a complaint against a drug manufacturer for overcharging for 340B drugs. Once HRSA’s 340B administrative dispute resolution rules are finalized and the appropriate system has been established, a covered entity could submit a claim against a manufacturer for an instance of overcharging for administrative dispute resolution.
The new regulation requires drug manufacturers to calculate the 340B ceiling price for each covered outpatient drug, by National Drug Code (NDC), on a quarterly basis. The 340B ceiling price is based on the Average Manufacturer Price (AMP) for the prior quarter, minus a Unit Rebate Amount. For new drugs, manufacturers will need to estimate the 340B ceiling price and then calculate the actual 340B ceiling price once the appropriate data is available. If an overcharge has a occurred as a result of this estimation, drug manufacturers must refund or credit a covered entity the difference between the estimated and actual 340B ceiling price within one hundred and twenty days. Overcharges may also occur if a drug manufacture does not credit or refund a covered entity after subsequent recalculations of the ceiling price by the Centers for Medicare and Medicaid Service (“CMS”). Overcharges are determined on an NDC code basis, and may not be offset by other discounts the manufacturer provides on any other NDC. Drug manufacturers are also required to ensure that 340B discounts are provided through distribution arrangements made by the manufacturer.
The new regulation is based upon a requirement set forth in the Affordable Care Act, and comes at a time when drug prices and the 340B Program are receiving heightened scrutiny by the incoming Congress and administration. We will continue to report on modifications to the 340B Program as they develop.
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