Could CMS Follow Up 340B Court Victory with Deeper Cuts for Hospitals?

Your 340B Report for Saturday August 1, 2020

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Could CMS Follow Up 340B Court Victory with Deeper Cuts for Hospitals?

Yesterday’s federal appeals court ruling upholding the Trump administration’s nearly 30 percent cut in 340B hospitals’ Medicare Part B drug reimbursement raises the question of what to expect in the short and long term when it comes to hospital payments. One possibility is that the U.S. Centers for Medicare & Medicaid Services (CMS) could forge ahead with even deeper cuts starting in 2021. It might do so in its Medicare Hospital Outpatient Prospective Payment System (OPPS) proposed regulation for next year, which could come as early as Monday.

The U.S. Court of Appeals for the District of Columbia Circuit ruled 2-1 Friday that CMS had statutory authority to impose 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.

CMS made the cuts in its OPPS final rules for calendar years 2018 through 2020. A federal district court struck down the cuts for 2018 and 2019 and ordered CMS to develop a remedy. CMS kept the cuts in place while it pursued its appeal.

Last November in its 2020 OPPS final rule, CMS said if it lost its appeal, it expected to propose its remedy for the cuts in its 2021 OPPS proposed rule. Part of district court’s reason for striking down the cuts was that CMS did not collect data needed to base hospitals’ Part B drug reimbursement on acquisition costs. In the 2020 final rule, CMS set in motion its controversial hospital 340B drug acquisition cost survey, which began in April and ended in May.  Hospital groups have questioned the quality of the survey results. 

CMS was expected to say in its OPPS proposed rule for 2021 that, if the appeals court ruled against it, it would base its remedy for the cuts on the hospital 340B drug acquisition cost survey results. The appeals court ruling makes that moot for now.

However, CMS also might say in the proposed rule that, starting next year, it will set 340B hospitals’ Part B drug reimbursement on similar survey data. That would be bad news for 340B hospitals. CMS has said it expects the survey to show that its current average sales price (ASP) minus 22.5 percent payment rate “overcompensates” 340B hospitals. Before the cut, hospitals were paid at a rate of ASP plus 6 percent.

When the White House Office of Management and Budget (OMB) approved the survey, it said that before CMS could use the data, it had to report to OMB on the “nonresponse bias” and “standard analytical results” for the survey. It is unclear if CMS has taken this step.

Late Thursday, OMB gave CMS permission to publish its OPPS proposed rule for next year. CMS could have posted it for public inspection as soon as yesterday, but did not. It instead posted three other Medicaid final and proposed rules that the White House approved in recent days.

November’s presidential election result could be decisive in whether the 340B hospital Part B drug reimbursement cuts continue or become even deeper. If President Trump wins reelection, CMS very likely will remain on its present course. If Democratic presidential nominee Joe Biden wins, his new administration might halt implementation of CMS’s 2021 OPPS rule. New presidential administrations often put holds on final regulations promulgated by the preceding administration just before it leaves office. While the Biden campaign has not specifically addressed the Part B cuts, it is safe to say that his administration would be very skeptical of efforts that it believes undermine safety net providers.

Appeals Court Decision

In yesterday’s federal appeals court decision, Chief Judge Sri Srinivasan, writing for himself and Judge Patricia A. Millett, held (1) that the U.S. Health and Human Services Department (HHS) had the authority to impose its 28.5 percent cut to Medicare Part B drug reimbursement rates for 340B hospitals, and (2) HHS interpreted that authority reasonably “so as to avoid reimbursing those hospitals at much higher levels than their actual costs to acquire the drugs.”

In reaching his decision, Srinivasan noted, “Over the past several years, observers have raised concerns about the intersection of the 340B program with Medicare Part B.” He cited U. S. Government Accountability Office (GAO) findings in 2015 that the gap between what 340B hospitals pay to acquire drugs and what Part B pays for those drugs “ranged from 25% to 55% of the cost of the drug.”

“By addressing the 340B–Part B payment gap, HHS hoped to mitigate ‘unnecessary utilization and potential overutilization of [Part B] drugs,’” he wrote. Srinivasan cited the same 2015 GAO report’s finding that 340B hospitals prescribed more drugs or more expensive drugs than other hospitals, “a disparity unexplained by salient distinctions between the hospitals or their patient populations.” He also cited HHS’s expressed desire to cut hospitals’ Part B reimbursement in order to “reduce the disproportionate coinsurance payments borne by Medicare Part B beneficiaries (mostly elderly patients) for” hospitals’ 340B-purchased drugs.

Srinivasan’s opinion does not cite findings last March by the Medicare Payment Advisory Commission that there is little evidence that 340B drug discounts induce hospitals to furnish more-expensive drugs to treat cancer than they otherwise would, raising patients’ coinsurance obligations and the cost of cancer care overall.

Srinivasan did agree with the lower federal court on a significant point. He rejected HHS’s argument that the OPPS statute precludes judicial review of its Part B drug reimbursement rate adjustments. If he had ruled the other way, the hospital plaintiffs’ appeal would be tougher, because they would first have to win on their right to sue before they could get to the merits of their case.

The dissenter in the outcome of the case, Judge Cornelia Pillard, agreed with the majority that the OPPS statute did not preclude judicial review of Part B drug reimbursement rate adjustments—making the vote 3-0 against HHS on that point.

Pillard disagreed with Srinivasan and Millett that the statute lets HHS single out 340B hospitals for rate reductions. Pillard held that HHS “may institute its large reductions, tailored for a distinct hospital group,” only if it exercises its option under the OPPS statute to base Part B drug reimbursement on hospitals’ actual average acquisition costs, based on survey data.

The fact that there is unanimity among the judges that CMS can use survey data to base reimbursement rates could embolden CMS to propose even deeper cuts, possibly in its 2021 OPPS rule.

Nonetheless, the pain that these cuts have already caused were clearly on the mind of at least one of the judges. “The challenged rules took a major bite out of 340B hospitals’ funding,” Pillard wrote. “Often operating at substantial losses, 340B hospitals rely on the revenue that Medicare Part B provides in the form of standard drug-reimbursement payments that exceed those hospitals’ acquisition costs. 340B hospitals ‘have used the additional resources to provide critical healthcare services to communities with underserved populations that could not otherwise afford these services.’”

“The net effect of HHS’s 2018 and 2019 OPPS rules is to redistribute funds from financially strapped, public and nonprofit safety-net hospitals serving vulnerable populations—including patients without any insurance at all—to facilities and individuals who are relatively better off,” Pillard concluded. “If that is a result that Congress intended to authorize, it remains free to say so. But because the statute as it is written does not permit the challenged rate reductions, I respectfully dissent.”

Reactions to Court’s Opinion

The American Hospital Association, the Association of American Medical Colleges, and America’s Essential Hospitals, the three hospitals groups that sued HHS over the cuts, said yesterday that “340B hospitals and the millions of patients they serve will suffer lasting consequences” from the decision. Their joint statement continues:

The decision conflicts with Congress’ clear intent and defers to the government’s inaccurate interpretation of the law, a point that was articulated by the judge who dissented from the opinion.  

For more than 25 years, the 340B program has helped hospitals stretch scarce federal resources to reach more patients and provide more comprehensive services. Hospitals that rely on the savings from the 340B drug pricing program are also on the front-lines of the COVID-19 pandemic, and today’s decision will result in the continued loss of resources at the worst possible time. 

We will continue to fight for our hospitals and their patients, and we call on CMS to reverse this harmful policy to ensure hospitals can continue to provide the services people need the most.

In a pair of tweets yesterday afternoon, CMS Administrator Seema Verma applauded the administration’s vindication by the court:


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