More on Reimbursement

Appeals court sides with HHS in drug payment cuts to 340B hospitals

HHS estimated in 2018 that the 28.5% cut to drug reimbursement rates would save Medicare $1.6 billion.

Susan Morse, Managing Editor

A federal appeals court ruled Friday that the Trump Administration and the Department of Health and Human Services has the legal authority to reduce payment for Medicare Part B drugs to 340B hospitals.

The 2-1 decision by the U.S. Court of Appeals for the District of Columbia Circuit reverses a decision by a lower court on action taken by HHS to lower the drug payments by 28.5%. 


HHS Secretary Alex Azar said the action means patients and especially those who live in vulnerable areas, will pay less out-of-pocket for drugs in the Medicare Part B program.

But providers, including the American Hospital Association, the Association of American Medical Colleges and America's Essential Hospitals, said the 340B decision will hurt hospitals and patients in these vulnerable areas.

Hospitals that serve large numbers of Medicaid, Medicare and uninsured patients were getting the drugs for a discounted price, but getting reimbursed at the higher price HHS pays all hospitals for Medicare Part B drugs.

The hospitals, many of which operate on thin margins or in the red, were using the pay gap in the price difference to cover operational expenses.

"As laudable as those activities may be," the court said, HHS found it inappropriate for Medicare to subsidize other activities by 340B hospitals.

Chief Judge Srikanth Srinivasan, writing for the majority said, "As HHS saw it, Medicare should not reimburse hospitals more than they paid to acquire the drugs."

Circuit Judge Cornelia Pillard, who wrote the dissenting opinion said, "The challenged rules took a major bite out of 340B hospitals' funding. 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 appeals court heard arguments in the case brought by the AHA and other organizations on November 8, 2019.

The district court sided with the plaintiffs and agreed that HHS had exceeded its statutory authority by reducing drug reimbursement rates for 340B hospitals. 

"We disagree," Srinivasan said. "We hold that HHS's decision to lower drug reimbursement rates for 340B hospitals rests on a reasonable interpretation of the Medicare statute."


In 2017, for the first time, HHS established two separate payment rates: one rate for hospitals participating in the drug discount program 340B and another rate for all other hospitals. 

The rate for non-340B hospitals was an estimated 106% of the average sales price. HHS calculates ASP every quarter using sales data confidentially provided by drug manufacturers.

The rate for 340B hospitals was adjusted down to ASP minus 22.5%, or 77.5% of ASP.

The program requires manufacturers, as a condition of having their drugs covered by Medicaid, to sell each covered drug to 340B entities at a ceiling price. 

The program covers at least 3,500 drugs, and the government estimates that 340B sales make up approximately 2.8% of the total U.S. drug market.

Observers have raised concerns, and government reports have found that 340B hospitals typically pay between 20% and 50% below ASP for covered drugs, but get reimbursed at Medicare Part B rates.

This left a gap between what 340B hospitals paid and what they were reimbursed, ranging from 25% to 55% of the cost of the drug. 

When it came time to set the 2018 outpatient prospective payment system rates, HHS decided to address the 340B-Part B payment gap. 

HHS believed that the gap allowed 340B providers to generate significant profits when they administered Part B drugs, the court said. 

HHS cited a Government Accountability Office study which found that 340B hospitals prescribed more drugs than other hospitals, a disparity unexplained by salient distinctions between the hospitals or their patient populations, the court said. 

Seeking to shrink those revenues, HHS imposed a 28.5% cut, from 106% of ASP to 77.5% of ASP, to the rates at which it would reimburse 340B hospitals. 

The new rate was based on a "conservative" estimate, presented by the Medicare Payment Advisory Committee, that 22.5% below ASP equaled the average minimum discount that a 340B participating hospital received.  

HHS estimated that its 28.5% cut to reimbursement rates would save Medicare $1.6 billion in 2018. 

As called for by the OPPS statute, HHS did not pocket the savings, but instead redistributed them to all hospitals in a budget-neutral manner by raising other Part B reimbursement rates. 

Part B beneficiaries generally pay 20% of their bill out of pocket as coinsurance.

Because the amount of a patient's coinsurance payment is a fixed percentage of the medical bill, patients' out-of-pocket coinsurance payments for the drugs sometimes exceeded a hospital's costs to acquire the drugs, the court said.


The AHA, AAMC and America's Essential Hospitals said, "America's 340B hospitals and the millions of patients they serve will suffer lasting consequences from today's D.C. Circuit Court of Appeals ruling allowing Medicare Part B cuts to stand. 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."
340B Health president and CEO Maureen Testoni said, "We are deeply disappointed by and concerned about the decision from the U.S. Court of Appeals for the District of Columbia Circuit allowing discriminatory Medicare Part B payment cuts to continue for many hospitals participating in the 340B drug pricing program. These cuts of nearly 30% have caused real and lasting pain to safety-net hospitals and the patients they serve. Keeping these cuts in place will only deepen the damage of forced cutbacks in patient services and cancellations of planned care expansions. These effects will be especially detrimental during a global pandemic."

Judge Pillard said, "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. 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."

Twitter: @SusanJMorse
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