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340B, When a Price Adjustment is Not Really an Adjustment, and the Implications for CMS Efforts to Attack Drug Prices

The Federal Courts gave the America Hospital Association and 340B covered entities a late Christmas present and in doing so may have dealt a blow to the Trump Administration’s initiatives aimed at controlling or reducing drug prices. 

On December 27, 2018, Judge Rudolph Contreras granted the American Hospital Association’s Motion for a Permanent Injunction over CMS’ Medicare Part B reimbursement cut for 340B hospitals.  As I have previously written, the vehicle for that reimbursement cut was the 2018 Outpatient Prospective Payment System (OPPS) rule, and CMS’ existing authority to adjust OPPS drug reimbursement.

By statute CMS has the authority to adjust OPPS drug reimbursement to approximate hospitals’ average acquisition cost for the drug or, if acquisition cost is not available, the reimbursement may be “as calculated and adjusted by the Secretary for purposes of this paragraph.”  Relying on that authority, in the 2018 OPPS rule CMS “adjusted” Part Medicare B reimbursement for 340B drugs from the standard of reported Average Sales Price (ASP) plus 6% down to ASP minus 30%.  CMS justified slashing the OPPS reimbursement rate because while 340B acquisition costs are confidential, multiple studies supported the belief that ASP plus 6% was significantly beyond the hospitals’ average acquisition cost for 340B drugs. 

Judge Contreras ruled that CMS acted ultra vires, or beyond its authority, when it implemented the Medicare Part B OPPS reduction for 340B drugs, holding that a reimbursement cut approximating 30% was just too extreme to qualify as an “adjustment.”   Judge Contreras found support for his view in a 2004 Court of Appeals decision, Amgen v. Smith, that held that the statutory authority to adjust OPPS payments “did not give the Secretary the absurdly broad power to make drastic adjustments…and term it an equitable adjustment.”  

However, the Judge stopped short when it came to the plaintiffs’ request for retroactive restitution and a reallocation of payments going forward.  Recall that the 2018 OPPS reimbursement cut was implemented with other payment adjustments because of a requirement that OPPS adjustments be budget neutral.  Judge Contreras recognized his ruling could “wreak havoc” on the already complex administration of the OPPS.  Instead, he issued the injunction and ordered supplemental briefing on the manner, scope and implementation of a future remedy.

In the meantime, this decision carries repercussions for CMS.  Recall that the 2019 OPPS rule further extended the Part B reimbursement cut for 340B drugs to non-excepted off-campus outpatient departments – a change imperiled by the ruling.  Moreover, CMS has theorized that its statutory authority to adjust prices in Medicare (and Medicaid) gives it broad discretion to devise ways to attack drug prices, including through proposed regulations involving drug advertising.  While this ruling will certainly be appealed in the long term, and may even be stayed pending appeal, Judge Contreras’s opinion will give CMS pause in the short term.   New regulatory proposals that attack drug prices may well leave CMS vulnerable to arguments that any major changes in the status quo are too extreme to be justified as “an adjustment.”    

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