Federal Court Says 2018 OPPS 340B Program Rate Cuts Unlawful, Orders Briefing to Avoid ‘Havoc’ on Medicare Program

On December 27, 2018, Judge Rudolph Contreras of the U.S. District Court for the District of Columbia ruled in favor of several associations and hospital plaintiffs, including the American Hospital Association (AHA) (Plaintiffs), finding that HHS exceeded its legal authority when it cut, by almost 30 percent, certain Medicare outpatient drug payments to hospitals under Medicare’s 340B program. The Court issued a merits decision while denying HHS’s motion to dismiss, concluding that HHS “exceeded [its] authority under 42 U.S.C. § 1395l(t)(14)(A)(iii)(II) in setting the 340B drug reimbursement rate in the 2018 OPPS Rule.” Given the ruling’s potentially drastic effects on the Medicare program, Judge Contreras ordered supplemental briefing before awarding Plaintiffs with any specific relief. The Court’s full opinion in American Hospital Association, et al. v. Azar, No. 18-2084(RC) (D.D.C. December 27, 2018) can be found here. Further background on the case can be found here.

Background on the 340B Program Rate Cut at Issue

Participating hospitals purchase 340B drugs at discounted rates and receive reimbursement by HHS at Outpatient Prospective Payment System (OPPS) rates after prescribing the drugs to Medicare beneficiaries. Before 2018, the OPPS reimbursement rate for the drugs was the average sales price (ASP) plus 6%. When HHS issued its final 2018 OPPS Rule, however, it pronounced a rate reduction for 340B drugs from ASP plus 6% to ASP minus 22.5% beginning in 2018. HHS claimed authority to pronounce such a reduction – one that would not be based on the drugs’ average acquisition costs – under 42 U.S.C. § 1395l(t)(14)(A)(iii)(II), which allows for calculation and adjustment “as necessary.”

The District Court’s Ruling

Renewing their efforts after an early dismissal, the Plaintiffs’ lawsuit challenged HHS’s 340B drug reimbursement rate reduction that became final in 2018. Plaintiffs argued that the reduction exceeded HHS’s statutory authority and violated the Administrative Procedure Act (APA) and the Social Security Act. Plaintiffs also requested either a preliminary or permanent injunction, asking the Court to direct HHS to “strike the changes in the payment methodology for 340B drugs from the OPPS Rule” and instead use the “methodology used in calendar year 2017 for all future 340B Program payments in 2018,” in addition to paying Plaintiffs the difference between reimbursements they received in 2018 under the new rates and reimbursements they would have received under the previous rates.

In response, HHS filed a motion to dismiss, claiming first that the Court lacks subject matter jurisdiction for three primary reasons: (1) Plaintiffs failed to exhaust their administrative remedies, (2) certain Medicare provisions preclude the Court’s review, and (3) HHS’s decision falls outside the scope of APA review. Second, HHS argued that Plaintiffs failed to state a claim upon which relief could be granted.

As framed by the Court, “the principle dispute among the parties is whether [under 42 U.S.C. § 1395l(t)(14)(A)(iii)(II)] the Secretary acted within his authority to ‘calculate[] and adjust[]’ the statutory benchmark rate of ASP plus 6% when he reduced that rate to ASP minus 22.5% based on his estimation of 340B hospitals’ drug acquisition costs, rather than the drugs’ average sales prices.” In a 36-page decision, the Court denied the motion to dismiss and granted Plaintiffs’ request for a permanent injunction. Specifically, the Court ruled that:

1. The Purported Jurisdictional Obstacles Are Not Fatal to Plaintiffs’ Case.

• • The Court waived the usual exhaustion requirement in 42 U.S.C. § 405(g). The Court reasoned that Plaintiffs’ attempts to exhaust their administrative remedies in this context would be futile, particularly because Plaintiffs’ objections were considered and overruled by HHS in the notice-and-comment rulemaking process.
  • The Court ruled that it is not precluded from evaluating Plaintiffs’ claim that HHS acted outside its authority because Plaintiffs’ claim could be an ultra vires claim that falls outside the scope of applicable preclusion provisions. Although HHS claimed that three Medicare provisions preclude the Court’s review, the Court made a substantive legal finding (as described more fully below) that HHS’s 340B reimbursement rate reduction was indeed an ultra vires act to which preclusion provisions do not apply.

2. HHS’s Rate Cut Patently Exceeded Its Authority to Adjust Rates (i.e., Was Ultra Vires).

• • Relying on Amgen, Inc. v. Smith, 357 F.3d 103 (D.C. Cir. 2004) as an analog, the Court noted that HHS’s argument that its authority to “adjust” reimbursement rates is a broad, plenary-like power is “plainly wrong.” The Court reasoned that, as in Amgen, “there is good reason to believe that Congress did not intend to confer” unbridled rate adjustment authority.
  • Because Amgen suggested as much, the Court found that HHS’s OPPS rate adjustment may be a patent abuse of authority forming the basis of an ultra vires action. The Court explained that the rate adjustment is sweeping, affecting “potentially thousands of pharmaceutical products found in the 340B Program,” rather than a handful of drugs. Moreover, the adjustment itself is a “nearly 30% reduction from the formula that Congress expressly set as the standard.” In other words, the purported “adjustment” was more like a “basic and fundamental” change in the reimbursement landscape rather than something less substantial. HHS’s rate adjustment was therefore ultra vires.

Because of the Court’s merits finding on the ultra vires question, HHS’s motion to dismiss was denied as to both the subject matter jurisdiction (Rule 12(b)(1)) and pleading sufficiency (Rule 12(b)(6)) challenges. Critically, because both parties acquiesced to the Court proceeding to offer a decision on the merits at the motion to dismiss stage, the Court entered judgment for Plaintiffs.

Although the Court’s typical remedy would be vacatur of the challenged rule, the “highly disruptive” nature of this relief (given budget neutrality and other concerns) prompted the Court to find a way to avoid a “quagmire” given the high volume of Medicare Part B payments made in 2018. The Court ordered supplemental briefing within 30 days on the relief’s proper scope and implementation.

King & Spalding will continue to monitor American Hospital Association, et al. v. Azar to provide timely updates on the Court’s decision.