The ruling reversed a lower court ruling regarding the drug discount program for hospitals that serve patients covered by Medicaid.
Reimbursements that HHS imposed for certain medications administered in outpatient clinics of 340B hospitals were based on a “reasonable interpretation of the Medicare statute” and can remain, a 3-judge panel of the US Court of Appeals for the District of Columbia ruled July 31, 2020.1
The 2-1 reverses a District Court level ruling that HHS, through CMS, exceeded its authority when it imposed a 28.5% rate cut for a category of outpatient drugs used by hospitals enrolled in the discount program, which was created to support safety net hospitals serving Medicaid patients.
The American Hospital Association (AHA) and 2 allies in the effort to restore 340B cuts issued a statement that suggests they will challenge the ruling. “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,” read the statement from AHA, America’s Essential Hospitals and the American Association of Medical Colleges.2
Hospital groups have the right to seek a ruling by an en banc panel.
The ruling is the latest twist in a battle over the 340B program, which even critics say started with good intentions but evolved into a way for hospitals to employ drug discounts beyond their walls that underwrite other operating costs.
Under the 340B program, pharmaceutical manufacturers must allow discounts for certain drugs to qualifying hospitals—which lets the hospital pay between 20% and 50% below the average sales price, while Medicare reimburses at the normal rate. When discounts under 340B were applied to certain Medicare Part B drugs given in the outpatient setting—whose reimbursements were calculated by specific formulas—it allowed hospitals to effectively make a profit off them, or at least CMS saw it this way, the appellate ruling said. Thus, in 2017, the Trump administration sought to narrow the gap between drug payments in 340B and those in Medicare Part B.3
Critics of the program say the 340B “discount” gets made up in the form of higher overall costs, and the pricing dynamics hurt seniors who are forced to pay a higher co-payment tied to a drug’s pre-discount price.
For several years, providers such as the Community Oncology Alliance have argued that the program’s expansion into outpatient clinics came at their expense, since non-hospital clinics could not compete on drug prices. These providers have been aided by reports from the Government Accountability Organization, including a January report that found poor oversight of the program and that some hospitals were getting discounts for which they did not qualify.4
“[The] court decision is another major victory for President Trump’s agenda of lower drug prices and better healthcare for all Americans,” HHS Secretary Alex Azar said in a statement. “Since HHS took the action that the court affirmed … we have saved more than $4.8 billion in lower drug costs and reinvested these savings in the Medicare program.”5
However, hospitals affected by the cuts have argued the lost revenue will impair their ability to provide critical services, and as they have stepped up that case as the coronavirus disease 2019 (COVID-19) pandemic has put unprecedented strain on large hospitals, including academic medical centers.
“These cuts of nearly 30% have caused real and lasting pain to safety-net hospitals and the patients they serve,” Maureen Testoni, president and CEO of advocacy group 340B Health, said in a statement. “Keeping these cuts in place will only deepen the damage of forced cutbacks in patient services and cancellations of planned care expansions.”6
Even as the matter has worked its way through the courts, HHS has continued to include the cuts in annual payment rules, and at least one observer wrote that it will interesting to see what happens next, given that hospital interests are waiting on an update to the Part B hospital outpatient prospective payment system (HOPPS) for 2021.
“Despite the lower court decision, CMS doubled down and maintained the cuts in the 2020 HOPPS rule while the government pursued its appeal,” wrote Alan M. Kirschenbaum in FDA Law Blog.7
In making its ruling, the DC Circuit panel relied on the same case as the District Court, but came up with a different interpretation, Kirschenbaum noted. While the lower court found that CMS had exceeded its authority, the 2 judges on the panel ruled found otherwise.
Writing for the panel, Chief Judge Padmanabhan Srikanth Srinivasan said, “Was HHS obligated to continue reimbursing 340B hospitals for [outpatient drugs] in amounts substantially exceeding their costs to obtain the drugs, with the resulting effects that concerned the agency on out-of-pocket copayments owed by Medicare beneficiaries? We think the agency was not compelled to continue doing so.”1
1. American Hospital Association et al v. Alex M. Azar II, et al. 19-5048-1854504  (US Circuit Court of Appeals, January 11, 2018). Accessed July 31, 2020. https://www.cadc.uscourts.gov/internet/opinions.nsf/B8E3F76510742B95852585B600531146/$file/19-5048-1854504.pdf
2. Statement on 340B court decision: AHA, AAMC, and America’s Essential Hospitals. News release. Published and accessed July 31, 2020. https://www.aha.org/press-releases/2020-07-31-statement-340b-court-decision-aha-aamc-and-americas-essential-hospitals
3. HHS Secretary Price: Trump administration taking action on drug prices. News release. Published July 13, 2017. Accessed August 2, 2020. https://www.hhs.gov/about/news/2017/07/13/hhs-secretary-price-trump-administration-taking-action-drug-prices.html
4. Government Accountability Office. Increased oversight needed to ensure nongovernmental hospitals meet eligibility requirements. GAO website. Published January 10, 2020. Accessed August 3, 2020. https://www.gao.gov/products/GAO-20-108
5. HHS Secretary Azar statement on court victory for President Trump’s drug-pricing agenda. News release. Published and accessed July 31, 2020.https://www.hhs.gov/about/news/2020/07/31/hhs-secretary-azar-statement-court-victory-president-trumps-drug-pricing-agenda.html
6. Daly R. Hospitals decry appeals court decision upholding 340B cuts. HFMA website. Published and accessed August 3, 2020. https://www.hfma.org/topics/news/2020/08/hospitals-decry-appeals-court-decision-upholding-340b-cuts.html
7. Kirschenbaum AM. DC Circuit reverses lower court, clearing way for CMS cuts in drug payment to 340B hospitals. FDA Law Blog. Published and accessed August 3, 2020. http://www.fdalawblog.net/2020/08/d-c-circuit-reverses-lower-court-clearing-the-way-for-cms-cuts-in-drug-payment-to-340b-hospitals/