The 340B Drug Pricing Program: A Federal Court Enters the Fray

By Ken Perez, vice president of healthcare policy, Omnicell.

Ken Perez
Ken Perez

The 340B Drug Pricing Program was created in 1992 to give safety net providers — those that deliver a significant level of both healthcare and other health-related services to the uninsured, Medicaid, and other vulnerable populations — discounts on outpatient drugs to “stretch scare federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” In brief, the program requires drug makers participating in Medicaid and Medicare Part B to provide discounts on outpatient drugs to 340B providers, which include various types of hospitals and certain federal grantees, such as federally qualified health centers and comprehensive hemophilia treatment centers.

For years, the 340B program has been fraught with controversy, with concerns raised about the program’s lack of accountability and oversight, and findings of widespread diversion of benefits (discounted drugs) to ineligible patients.

The nonpartisan Medicare Payment Advisory Committee (MedPAC) found that hospitals in the 340B program receive a minimum discount of 22.5 percent of Average Sales Price (ASP) for drugs paid under the Medicare Hospital Outpatient Prospective Payment System (OPPS). The Office of the Inspector General of the U.S. Department of Health and Human Services (HHS) found that the average 340B discount was 34 percent of ASP, and at least two organizations with 340B members estimated that 340B discounts could be as high as 50 percent of ASP.

Based in part on these findings, in 2017 HHS proposed and finalized a rule implementing a sharp reduction in 340B reimbursement of hospitals by the Centers for Medicare and Medicaid Services from ASP plus 6 percent to ASP minus 22.5 percent, along with an offsetting payment rate increase for non-drug items and services. It was estimated that 85 percent of 340B hospitals would see overall net payment increases in 2018 as a result of these changes, and that 340B hospitals would continue to benefit financially from the program.

Nevertheless, the American Hospital Association (AHA), America’s Essential Hospitals, and the Association of American Medical Colleges—all non-profit hospital associations—filed suits against HHS to block the change.

On Dec. 27, 2018, Washington, D.C. federal district court judge Rudolph Contreras (a Democrat nominated by President Barack Obama), issued a 36-page ruling in favor of the AHA, et al. and struck down the 340B payment reduction, contending that HHS Secretary Alex Azar exceeded his statutory authority by issuing a policy that would “fundamentally rework the statutory scheme.”

Contreras issued a permanent injunction of the new reimbursement policy, but he did not grant the plaintiff’s request for retroactive OPPS payments based on the original reimbursement formula. (HHS is unable to come up with the monies to pay back the hospitals, as they have already been spent.) Contreras ruled that the plaintiffs “are entitled to some relief,” but, recognizing “the potentially drastic impact of …[his] decision on Medicare’s complex administration,” he ordered a supplemental briefing to come to a “proper remedy.”

There are two issues in dispute:

First, there is some debate as to whether HHS can use ASP as the basis for calculation and adjustment for reimbursement, rather than the (higher) average acquisition cost (AAC), which varies by hospital. AAC is the “default” basis per the statute (in the Social Security Act). However, the statute also says that the HHS Secretary can use the “average price for the drug” if hospital acquisition cost data are not available, and HHS has stated that it lacks hospital acquisition cost data by drug.

The second and more fundamental issue is whether HHS has the statutory authority to make such a sizable change to the reimbursement rate—a 28.5 percent of ASP swing. Does it constitute a legally allowable adjustment as argued by Azar or is it an unallowable reworking of the statutory scheme, as Contreras ruled?

Reflecting surprise at the D.C. court’s ruling, the AHA, et al. said that they were “immeasurably pleased” with it, and one law firm described it as “a late Christmas present” to them.

For-profit hospitals, as represented by the Federation of American Hospitals (FAH), and rural hospitals—both of which would be disadvantaged by the judge’s ruling—were not pleased, and FAH, perhaps in some sort of collaboration with HHS, will appeal the ruling.

Thus, the soap opera surrounding the 340B program continues, with the judicial branch entering the fray. As a result, a new cloud of uncertainty now hangs over the program, and one has to wonder what sort of precedent this may set for organizations that are displeased with policy changes set forth by the executive and/or legislative branches of the federal government.

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