After Big Win in Court, CMS Proposes Cutting 340B Drug Payments Even More

Your 340B Report for Tuesday August 4, 2020

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CMS proposes cutting hospitals’ Medicare Part B reimbursement for 340B-purchased drugs next year by 6.2 percent below the current rate. If CMS ultimately carries out its plan, hospitals’ Part B payments for 340B drugs will be roughly two thirds of what they were in 2017. | Source: Shutterstock

After Big Win in Court, CMS Proposes Cutting 340B Drug Payments Even More

Fresh off a major federal appeals court win, the U.S. Centers for Medicare & Medicaid Services (CMS) proposed this morning to cut Medicare Part B payments to hospitals for 340B-purchased drugs next year and in subsequent years by 6.2 percent below the current rate. CMS announced the cut in its hospital Outpatient Prospective Payment System (OPPS) proposed rule for calendar year 2021. Comments are due no later than 5:00 p.m. Eastern on Oct. 5.

Reimbursement for 340B drugs for disproportionate share hospitals (DSH), rural referral centers (RRC), and non-rural sole community hospitals (SCH) under OPPS would be set at average sales price (ASP) minus 34.7 percent, plus an add-on of 6 percent of ASP, for a net payment rate of ASP minus 28.7 percent. CMS has been paying these hospitals ASP minus 22.5 percent since 2018. Critical access hospitals, rural SCHs, and freestanding children’s and cancer hospitals have been exempted from the reductions and continue to be paid the default ASP plus 6 percent rate.

CMS derived the new, lower reimbursement rate from its survey in April and May of hospitals’ net average acquisition costs for drugs bought through the 340B program, including sub-ceiling price discounts. In the new proposed rule, CMS said, “those survey data confirm that the ASP minus 22.5 percent rate is generous to 340B hospitals, and the survey data supports an even lower payment rate.”

A federal appeals court ruled 2-1 Friday that CMS had statutory authority to impose a nearly 30 percent cut to Medicare Part B drug reimbursement rates for 340B hospitals in 2018 and 2019. The reduction also is in place this year. Before the cuts, the hospitals were paid at ASP plus 6 percent. The American Hospital Association, the Association of American Medical Colleges, and America’s Essential Hospitals, which sued CMS over the cuts along with three health systems, said in a statement they “will continue to fight…this harmful policy.”

In the proposed rule, CMS defended its policy for 340B drugs. “We believe it is appropriate for the Medicare program to pay for [drugs] purchased under the 340B program at a rate that approximates what hospitals actually pay to acquire the drugs, and we believe it is inappropriate for Medicare to subsidize other programs” through its payments for drugs.

“While we continue to believe that ASP+6 percent represents a reasonable proxy for Part B drug acquisition costs for most hospitals, we do not believe the same is true for hospitals that acquire Part B drugs under the 340B program since such hospitals are able to purchase drugs at deeply discounted 340B ceiling prices or at even lower ‘sub-ceiling’ prices,” CMS said in the proposed rule. “For this reason, we concluded that it was appropriate to survey 340B hospitals to gather drug acquisition cost data for drugs acquired under the 340B program to allow us to pay hospitals for these drugs at amounts that approximate the hospitals’ acquisition costs.”

CMS said it interprets the Social Security Act to permit it “to survey 340B hospitals only and formulate a 340B payment policy for this hospital group that is distinct from the payment policy for non-340B hospitals.” Some argue that if CMS decides to base Part B drug reimbursement for 340B hospitals on a survey of acquisition costs, it must base reimbursement for all hospitals similarly.

In its survey this spring, CMS gave 340B hospitals a choice: (1) provide acquisition costs for each individual specified covered outpatient drugs during fourth quarter of 2018 and/or the first quarter of 2019 (the detailed survey); or (2) indicate that it preferred that CMS use the 340B ceiling prices obtained from the U.S. Health Resources and Services Administration (HRSA) as reflective of their hospital acquisition costs (the quick survey). Hospital groups objected to the survey, arguing that it was inappropriate to distract providers from treating a global pandemic, and that flaws in the survey required that it be withdrawn.

CMS said only 7 percent of hospitals completed the detailed survey. Fifty-five percent chose the quick survey option. “The remaining 38 percent “did not respond affirmatively to either survey option.” In the latter case, CMS said it applied 340B ceiling prices, which it said “may skew the survey results towards the minimum average discount.”

Regarding its proposed ASP plus 6 percent add-on for 340B purchased drugs, CMS said it was doing so “in lieu of calculating individual acquisition cost amounts for 340B-acquired drugs.” Reporting individual costs, it said, “could reveal sensitive or protected pricing information.” CMS said it was not proposing a separate add-on to take account of overhead and handling because it believes its proposed net payment rate is conservative and “may already account for the costs of overhead and handling.”

CMS excluded penny-priced 340B drugs from its cost calculations. “Because penny pricing is dynamic and the drugs to which it applies may vary from quarter to quarter, we believe it is appropriate to propose to exclude penny pricing from our survey analysis,” it said. CMS invited public comment on its decision.

CMS said some hospitals that completed the detailed survey reported acquisition costs for drugs above 340B ceiling prices. It said it attributed any data greater than the 340B ceiling price “to potential data entry error, for instance, miscalculation or incorrect decimal point placement.”

“However, because hospitals may have been overcharged for their drug acquisition costs and could have accurately reported acquisition costs greater than the HRSA ceiling price, we did not eliminate these data from our calculations,” it continued. CMS excluded any such responses “that were three standard deviations from the geometric mean.”

CMS said it “may revisit [its] policy to exempt rural SCHs, as well as other hospital designations for exemption from the 340B drug payment reduction, in future rulemaking.”

340B Report will have additional coverage of CMS’s proposed rule in the coming days.

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More Takes on Federal Appeals Court’s 340B Decision

U.S. Health and Human Services (HHS) Secretary Alex Azar called Friday’s federal appeals court ruling upholding the nearly 30 percent cut since 2018 in 340B hospitals’ Medicare Part B drug reimbursement “another major victory for President Trump’s agenda of lower drug prices and better healthcare for all Americans.”

“Since HHS took the action that the court affirmed today,” Azar said in a July 31 statement, “we have saved more than $4.8 billion in lower drug costs and reinvested these savings in the Medicare program. Thanks to President Trump’s actions, Medicare patients, and especially those who live in more vulnerable areas, are now paying less out-of-pocket for the drugs they need.”

The U.S. Court of Appeals for the District of Columbia Circuit ruled 2-1 Friday that the U.S. Centers for Medicare & Medicaid Services (CMS) had statutory authority, and exercised it reasonably, in imposing a 28.5 percent cut to Medicare Part B drug reimbursement rates for 340B hospitals in 2018 and 2019. The reduction also is in place this year. 

We reached out to several health care attorneys with expertise in 340B matters to get a sense of what steps the hospitals might take in challenging the decision.

Barbara Straub Williams, Principal, Powers Law (a 340B Report sponsor)

The ruling from the D.C. circuit court affects only Medicare payments to 340B hospitals, but it is disappointing for all 340B covered entities. The 340B program was designed to provide cost savings to safety net providers so that those providers could reach more patients and provide more comprehensive services. The intent of the 340B program is not to pass along savings to payers. The plaintiffs in the case have the opportunity to request a rehearing by a full panel of judges (called an en banc review) at the D.C. circuit court and/or they may submit a petition for review by the U.S. Supreme Court.

Richard Church, Partner, K&L Gates

The loss at the D.C. circuit means that, pending an en banc hearing or further appeal, hospitals’ hopes for a retroactive remedy or unwinding the reimbursement cut—which CMS has been applying regardless of its early litigation losses—are waning. As a result, this change in reimbursement for Medicare outpatient drugs purchased under the 340B program will likely become a permanent fixture of the OPPS. In this regard, for better or worse, it is important to note that covered entities and now payors, such as Medicare, are sharing in significant savings from the 340B program, which may lead to payors and covered entities aligning on the importance of protecting the 340B program going forward.

Helen Pfister, Partner, Manatt, Phelps, & Phillips

Between this and the same court’s decision a couple of weeks ago upholding HHS’s reduction in Medicare payments to hospital off-campus clinics, these are two significant setbacks for the hospital industry. That said, the big question is whether the hospitals will appeal this decision. If they do, this may not be the final word on this issue.

Andrew Ruskin, Partner, K&L Gates

This is another case where the court (the same judge, in fact) is creating an entirely new way of looking at statutes. On page 24 of the opinion is the most telling language in the 42 pages. In it, the court says that CMS’s interpretation is not “unambiguously barred” from its interpretation. This is an unbelievably high standard that will make it very difficult to win cases in the future, and arguably is inconsistent with the case law standard established by Chevron [Chevron v. NRDC, a 1984 case in which the U.S. Supreme Court established a legal test for when federal courts should defer to a federal agency’s statutory interpretation] for looking at whether statutes and regulations are inconsistent. AHA should be strongly encouraged to bring this and the site-neutrality cases to the Supreme Court because, otherwise, CMS may continue to take actions that chip away at the prospective payment system that Congress carefully crafted decades ago.

Todd Nova, Shareholder, Hall Render

We represent a substantial number of hospitals, which limits what I can say about the result. I can say, however, that we are disappointed, and disagree with, the court’s ruling. If upheld, the ruling would serve to substantially limit the ability of these vital safety net hospitals to provide desperately needed frontline safety-net services.

Donna Lee Yesner, Counsel, Morgan, Lewis & Bockius

I will be interested to see if the hospitals appeal on whether Chevron should apply to particular legal analyses of statutory language and the intent of Congress. The Supreme Court may be interested in reviewing the Chevron standard where, it may conclude, such an analysis does not require agency expertise, and curb agencies’ power to regulate.


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AHA Asks Azar to Stop Drug Companies’ Clampdowns on 340B Contract Pharmacy

Three drug manufacturers’ recent actions on 340B contract pharmacy are “in direct conflict” with federal law and program guidance and should be stopped immediately, the American Hospital Association (AHA) told U.S. Health and Human Services (HHS) Secretary Alex Azar late last week.

In a July 30 letter—the same day it suffered defeat to Azar in its suit over Medicare drug reimbursement cuts for 340B hospitals—AHA expressed concern to the HHS secretary about Eli Lilly, Merck, and Sanofi’s moves “to limit the distribution of certain 340B drugs to our hospital members.”

Lilly has stopped distributing three formulations of Cialis to 340B contract pharmacies, saying the 340B statute does not require it to provide 340B-priced product to contract pharmacies, and that 340B program contract pharmacy guidance is inconsistent with the statute and unenforceable. Merck and Sanofi each are requiring 340B covered entities to submit claims data for their products so the companies can check for Medicaid and commercial duplicate discounts. Merck said it may respond to uncooperative 340B entities with unspecified further action that is less collaborative and more burdensome. Sanofi said 340B entities that don’t share their claims data will no longer be eligible to place bill to / ship to orders for Sanofi products dispensed by contract pharmacies.

AHA told Azar:

[The U.S. Health Resources and Services Administration] HRSA established and expanded to use of contract pharmacy to improve access to 340B drugs for vulnerable populations served by the 340B program. 340B hospital and community health clinics are all obligated to meet the statutory and regulatory requirements of the 340B program. Neither the 340B statute nor the HRSA guidance would allow Eli Lilly to deny 340B pricing to a covered entity, or to require that a drug purchased by a covered entity be shipped only to locations that the manufacturer has approved. Eli Lilly, Merck and Sanofi are picking and choosing those requirements with which they will adhere. They are publicly flaunting the 340B statute and HRSA 340B programmatic guidance and taking matters into their own hands to suit their best interests.

The AHA urges HRSA to address these abuses by Merck, Eli Lilly and Sanofi and request they cease this activity and work to ensure that 340B drugs are available and accessible to communities and vulnerable populations. 340B hospitals continue to struggle to meet the demands of the COVID-19 public health emergency and it is outrageous that in the middle of a pandemic, hospitals are facing added challenges to the drug supply chain brought on by the actions of these major drug manufacturers.

Impasse Continues on Next Round of Federal COVID-19 Relief

Trump administration officials and congressional Democratic leaders continue to negotiate the terms of a new COVID-19 relief bill, with Senate Republican leaders on the sidelines for now.

A temporary $600 per week increase in unemployment benefits under the CARES Act expired July 31, as did a moratorium on evictions for nonpayment of rent under CARES. The U.S. unemployment rate was 11.1 percent in June; July’s rate will be released Friday. Nonprofit group Families USA reported last month that 5.4 million workers laid-off between February and May lost their employer-based health insurance. The developments point to more reliance on health care safety net providers.

Meanwhile, hospitals that received temporary advances on future Medicare payments lasting 120 days under CARES are becoming obliged to pay the money back. Most types of hospitals were able request up to 100 percent of the Medicare payment amount for a six-month period; critical access hospitals were able ask for 125 percent. Soon, when these hospitals submit claims to the U.S. Centers for Medicare & Medicaid Services, instead of paying, CMS will subtract from the balance due on the advance.

All of this is occurring as White House COVID-19 response leader Deborah Birx warned on Sunday the pandemic has entered a “new phase” with infections and deaths rising nationwide, just as the new academic year is set to start.

The American Hospital Association (AHA) estimates health systems and hospitals will lose a combined $323 billion due to COVID-19 by the end of the year. AHA is asking Congress and the White House for at least another $100 billion for the CARES Act Provider Relief Fund, forgiveness for the Medicare accelerated and advance payments coming due, maintenance of health benefits for families and individuals, and increased coverage options for the uninsured.

The Senate Republican COVID-19 relief proposal calls for an additional $7.6 billion for community health centers, and $225 million more for rural health clinics. The House Democrats’ proposal likewise calls for an additional $7.6 billion for health centers and an additional $10 million for Ryan White HIV/AIDS clinics.