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340B Rate Cuts: DC Court Enjoins and Remands CMS’ 2018 and 2019 Reductions for Hospital Outpatients

On May 6, 2019, a federal district court held that the Department of Health and Human Services’ (HHS) 2018 and 2019 rate reductions for 340B Program participants, including safety net hospitals and other providers, were unlawful.  Although the court found that the 340B rate cuts in both 2018 and 2019 were unlawful, it did not vacate the rules because doing so would wreak havoc on Medicare’s administration.  Instead, the court remanded both rules to HHS to determine proper remedies.  


The 340B Program requires pharmaceutical manufacturers participating in Medicaid to provide discounts on covered outpatient drugs to eligible providers, including certain public and nonprofit hospitals and certain federal grantees that serve medically underserved populations. In its 2018 outpatient prospective payment system (OPPS) rule, Medicare  reduced payments to hospitals for drugs purchased under the 340B program by nearly 30% (from average sales price (ASP) plus 6% to ASP minus 22.5%), to reduce reimbursement to reflect the discounts received by 340B hospitals.  Because these rate cuts were implemented in a budget neutral matter, the resulting savings were redirected to increase payments for other services or to other providers.  

In 2017, before the payment cuts went into effect, a group of hospitals sued HHS to stop the 2018 cuts.  The U.S. District Court for the District of Columbia dismissed the law suit as premature because the hospitals had not yet filed claims for payment. Once the cuts went into effect on January 1, 2018, the hospitals filed claims for reimbursement that progressed through the appeals process. The hospitals argued that the payment cuts violate the Administrative Procedure Act and exceed the agency’s statutory authority.

On December 27, 2018, the same federal district court ruled that HHS exceeded its authority when it reduced 2018 Medicare OPPS reimbursement to hospitals for drugs purchased under the 340B Program.  The court found that the rate cut, which significantly reduced payments was unlawful.  Although the court ruled in favor of the hospitals on the merits and enjoined the rule, it did not agree with the hospitals that vacating the rule was the appropriate remedy, because doing so could be highly disruptive to Medicare.  The court ordered additional briefing on the appropriate remedy.  

In the meantime, on January 1, 2019, the 2019 OPPS rule went into effect.  In those rules, Medicare continued the same 340B Program cuts, and extended them to new hospital locations.  The hospitals submitted a supplemental complaint to the court, relying on the arguments in its original complaint, and asked the court for a permanent injunction of the 2019 OPPS rule.  

May 6 Ruling

On May 6, 2019, the same federal district court held that HHS’ 2019 Medicare 340B rate cut for drugs purchased through the 340B Program by safety net hospitals and other 340B providers is unlawful for the same reasons it found the 2018 cuts to be unlawful.  Although the court again ruled in favor of the hospitals on the merits of the case, the court still was not persuaded that vacating the rule was appropriate. After reviewing the parties’ additional briefing on possible remedies, which they submitted in response to the court’s December 27 order, the court determined that “vacating HHS’ 2018 and 2019 rules is not the best course of action” because of the complexities of Medicare reimbursement, including budget neutrality.  The court instead remanded the matter back to HHS to, as the court put it, “unscramble the egg.”  The impact of the ruling on 340B hospitals will be determined by HHS’ response to the court’s request.  

Remedies to be Determined

If the court had vacated the 2018 and 2019 OPPS rules, HHS would have been required to revert to the prior, 2017 payment methodology. In its December 27, 2018 ruling, the court noted that under Medicare Part B’s budget neutrality requirement, reducing the 340B payments allowed the agency to increase reimbursements for other drugs and services covered under Medicare Part B. To increase 340B payments would require a reduction in other hospital outpatient services reimbursements.  In that ruling, the court recognized the “havoc that piecemeal review of OPPS payments could bring about.”

That concern led the court to remand both rules to the agency to take “the first crack at crafting appropriate remedial measures.” Changes to OPPS payments generally must be budget neutral, but the court noted that the parties strongly debate whether potential remedial rate adjustments must be budget neutral. The court did not come to a conclusion on whether adjustments must be budget neutral, but it identified possible options, including retroactive payment adjustments or prospective payment increases for 340B hospitals, to offset the rate reductions under the 2018 and 2019 rules, in a non-budget neutral manner.  

The court will retain jurisdiction over the matter and “may reconsider the remedy if the agency fails to fulfill its responsibilities in a prompt manner.” 

HHS Appeal 

On February 22, 2019, HHS appealed the district court’s December 27 decision regarding the 2018 adjustments to the U.S. Circuit Court of Appeals for the District of Columbia.  Based on a motion from HHS, the court of appeals is holding the case in abeyance until the district court has entered final judgment on the remedies, which it will do following HHS’ proposal of remedies.  Once the district court proceedings are completed, the parties will have 30 days to file motions in the circuit court on future proceedings.  

What’s Next?

The court ordered the parties to submit a status report regarding the HHS’ progress in remedying the issues raised in the litigation by August 5, 2019.  The hospitals have already filed a motion asking the court to modify its May 6 order to include a firm date, June 28, 2019, by which HHS must propose a remedy to the court.  

Both 340B and non-340B hospitals should carefully monitor HHS’ proposed remedies this summer, as the relief has the potential to affect billions of dollars in OPPS revenue either in the coming years, or potentially for 2018 and 2019 payments. 

© 2020 Foley & Lardner LLP


About this Author

Jill Wright, Attorney, Foley

Jill Wright is a special counsel and health care lawyer with Foley & Lardner LLP. Her practice focuses on health care fraud and abuse and compliance issues, including the federal Anti-Kickback and Physician Self-Referral/Stark laws, civil monetary penalties law, false claims and overpayments, government investigations, and exclusions from federal health care programs.

Hannah E. Zaitlin, Foley, health care providers lawyer, mergers acquisitions attorney
Senior Counsel

Hannah E. Zaitlin is an associate and health care business lawyer with Foley & Lardner LLP. Her practice focuses on advising health care providers and companies on mergers, acquisitions and affiliations, entity formation and restructurings, corporate and non-profit governance, debt and equity financings, and commercial contracting. She frequently counsels clients on a range of health care compliance and regulatory matters, including state and federal fraud and abuse laws, HIPAA, professional and facility licensure, and payor/reimbursement issues. Ms. Zaitlin is a member of the firm’s Health Care Industry Team.

Adria Warren, Health Care Attorney, Foley Law Firm

Adria E. Warren is a partner and health care lawyer with Foley & Lardner LLP. Ms. Warren’s practice focuses on advising clients with respect to mergers, acquisitions, affiliations and strategic transactions, including forming provider groups, networks, alliances, and joint ventures. She is a member of the Health Care and Technology Industry Teams as well as the Transactional & Securities, Private Equity & Venture Capital, and International Practices.

Prior to joining Foley’s Health Care Industry Team, Ms Warren was a senior counsel...

Anil Shankar, Foley Lardner, Health Care Lawyer, Attorney, Legislation
Senior Counsel

Anil Shankar is an associate with Foley & Lardner LLP. He focuses his practice on complex regulatory and reimbursement matters, with a particular focus on the Medicaid program and issues affecting safety net providers. He has conducted extensive research and advised clients with regard to the implementation and development of Medicaid demonstration projects, and has analyzed opportunities for, and helped to implement, Medicaid supplemental payments. Mr. Shankar routinely advises clients on new developments in the Medicaid program, including issues related to Medicaid...