A federal judge on Monday ordered HHS to come up with a remedial measure that would address hospital payment cuts under Medicare's 340B drug discount program for 2018 and 2019, which the judge previously ruled were unlawful.

The 340B drug pricing controversy, explained

Background

Medicare's 340B program requires drug manufacturers to provide outpatient drugs to eligible health care providers at discounts ranging from 20% to 50%. The program, created by Congress in 1992 and expanded under the Affordable Care Act, focuses its discounts on hospitals with disproportionately low-income patient populations.

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On Jan. 1, 2018, a final rule took effect that changed the way CMS reimburses hospitals for drugs purchased under the program. Previously, hospitals purchased drugs at a discounted rate and were reimbursed at 6% on top of a drug's average sales price. But as of Jan. 1, 2018, hospitals were reimbursed at average sales price minus 22.5%, a change CMS estimated would cut payments by $1.6 billion. Those cuts are budget-neutral, and CMS said it would redistribute the savings by raising Medicare payments to hospitals for non-drug items and services under the Hospital Outpatient Prospective Payment System (OPPS) in calendar year 2018.

The American Hospital Association (AHA), the Association of American Medical Colleges (AAMC), and America's Essential Hospitals (AEH)—joined by Eastern Maine Healthcare Systems, Henry Ford Health System in Detroit, and Park Ridge Health-Hendersonville in North Carolina—sued CMS over the cuts in September 2018, arguing the agency lacked the authority to lower the payments. The groups asked the court to have CMS reimburse hospitals for the difference between what they were paid for under the 2018 rule and what they would have been paid without the cut.

U.S. District Judge Rudolph Contreras in January ruled HHS unlawfully cut Medicare Part B reimbursements for drugs purchased under the 340B program, siding with AHA and other hospital groups in the suit. However, Contreras did not strike down the rule, noting that, in this case, doing so would be disruptive because the payment cut was budget neutral. He wrote, "The retroactive OPPS payments that [p]laintiffs seek here would presumably require similar offsets elsewhere; a quagmire that may be impossible to navigate considering the volume of Medicare Part B payments made in 2018."

As such, Contreras asked that both sides submit briefs on the best way to move forward and avoid the "havoc" of vacating part of the rule.

Judge blocks payment cuts

Contreras on Monday blocked the rule but did not grant hospitals a permanent injunction against the payment cuts, as they had requested, Modern Healthcare reports.

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Contreras in his decision wrote that the HHS secretary's "deficiencies … were substantial" when it came to finalizing and implementing the final rule. He wrote that the secretary "patently violated the Medicare Act's text," adding, "Unlike cases in which the agency's decision may have been lawful, but was inadequately explained … no amount of reasoning on remand will allow the secretary to re-implement the 340B rates in the same manner."

But instead of blocking the cuts in their entirety, Contreras ordered HHS to take a "first crack" at implementing a remedial measure to address the cuts and to provide a status update on the effort by Aug. 5. Contreras in his ruling noted that blocking the 2018 and 2019 cuts altogether could wreak "havoc" on Medicare and cost the federal government millions of dollars. Contreras wrote, for example, that "because HHS has already processed claims under the previous rates, the secretary would potentially be required to recoup certain payments made to providers; an expensive and time-consuming prospect."

However, Contreras wrote that the court could reconsider its order if HHS "fails to fulfill its responsibilities in a prompt manner."

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AAMC, AEH, and AHA in a joint statement applauded the ruling. The groups "urge[d] HHS to promptly comply with the judge's ruling and restore to 340B hospitals all funds that have been unlawfully withheld."

Maureen Testoni, CEO of the industry group 340B Health, in a statement said the organization was "pleased that the court has, once again, found that HHS exceeded its statutory authority by cutting what Medicare pays for outpatient drugs delivered to their patients." She added, "The sooner this policy is reversed, the better hospitals will be able to serve the needs of patients with low incomes and those in rural communities. HHS must act quickly, as any further delay will only harm patients and the hospitals they rely on for care" (Luthi, Modern Healthcare, 5/7; O'Brien, HealthLeaders Media, 5/7; Gooch, Becker's Hospital CFO Report, 5/7; Stein, Inside Health Policy, 5/7 [subscription required]).

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