News Alert: 340B Drug Rebate Lawsuit Dismissed

The 340B drug pricing program has suffered a major setback.

The axe fell on the American Hospital Association (AHA) and on hospitals across the country when the U.S. Court of Appeals dismissed a key AHA lawsuit on Tuesday.

Following what can only be called a tempestuous journey, the fight against the 340B drug program reimbursement rates may now be over. After AHA’s plea for an injunction was dismissed in District Court, AHA appealed to the Court of Appeals, claiming the 30 percent reimbursement rate cut violated the U.S. Department of Health and Human Services’ (HHS’s) rulemaking authority. But neither court ever discussed the merits of AHA’s claim. In the end, it was a jurisdictional decision, with the Court of Appeals siding with HHS.

Was the decision correct? From my perspective, AHA could have won the case had it approached things differently. But you know what they say, “hindsight is always 20/20.”

The Background 

 On Nov. 1, 2017, HHS released a final rule implementing a payment reduction for most covered outpatient drugs billed to Medicare by 340B-participating hospitals, with the payment going from the current average sales price (ASP) plus 6 percent to ASP minus 22.5 percent, representing a payment cut of almost 30 percent.

Effective Jan. 1, 2018, the 30 percent slash in reimbursement rates became reality, but only for locations physically connected to participating hospitals. The Centers for Medicare & Medicaid Services (CMS) is expected to broaden the reduction to all 340B-participating entities in the near future.

What is the 340B drug program? The easiest explanation is that government insurance, Medicare and Medicaid, do not want to pay full price for medicine. In an effort to reduce costs of drugs for the government payors, the government requires that all drug companies enter into a rebate agreement with the HHS Secretary as a precondition for coverage of their drugs by Medicaid and Medicare Part B. If a drug manufacturer wants its drug to be prescribed to Medicare and Medicaid patients, then it must pay rebates.

The Lawsuit

The AHA filed for an injunction last year requesting that the U.S. District Court enjoin CMS from implementing the 340B payment reduction. On the merits, AHA argued that the rate reduction constituted an improper exercise of HHS’s statutory rate-setting authority.

The District Court did not reach an opinion on the merits; it dismissed the case in a decision issued Dec. 29, 2017, based on lack of subject matter jurisdiction. The District Court found that whenever a provider challenges HHS, there is only one potential source of subject matter jurisdiction: 42 U.S.C. § 405(g). The Medicare Act places strict limits on the jurisdiction of federal courts to decide “any claims arising under” the Act.

The Supreme Court has defined two elements that a plaintiff must establish in order to satisfy § 405(g). First, there is a non-waivable, jurisdictional requirement that a claim for benefits shall have been “presented” to the Secretary. Without presentment, there is no jurisdiction.

The second element is a waivable requirement to exhaust administrative remedies. I call this legal doctrine the Monopoly requirement. Do not pass go. Go directly to jail. Do not collect $200. Unlike the first element, however, a plaintiff may be excused from this obligation when, for example, exhaustion would be futile. Together, § 405(g)’s two elements serve the practical purpose of preventing premature interference with agency processes so that the agency may function efficiently, and so that it may have an opportunity to correct its own errors, to afford the parties and the courts the benefit of its experience and expertise, and to compile a record deemed adequate for judicial review. However, there are ways around these obsolete legal doctrines in order to hold a state agency liable for adverse decisions.

Following the Dec. 29, 2017, order by the District Court, which dismissed the AHA lawsuit on jurisdictional grounds, the plaintiffs appealed to the U.S. Court of Appeals (COA), which promptly granted AHA’s request for an expedited appeal schedule.

In its brief, AHA contended that the District Court erred in dismissing their action as premature, and that their continued actual damages following the Jan. 1 payment reduction’s effective date weighs heavily in favor of preliminary injunctive relief. More specifically, AHA argued that the 30 percent reduction is causing irreparable injury to the plaintiffs “by jeopardizing essential programs and services provided to their communities and the vulnerable, poor, and other underserved populations, such as oncology, dialysis, and immediate stroke treatment services.”

By contrast, the government’s brief rests primarily on jurisdictional arguments, specifically that: a) the Medicare Act precludes judicial review of rate-setting activities by HHS; and b) the District Court was correct that no jurisdiction exists. Oral arguments on this appeal were heard on May 4, 2018.

The Decision

 In a unanimous decision, three judges from the COA sided with HHS and ruled the hospitals’ suit was filed prematurely due to the fact that hospitals had not formally filed claims with HHS (because they were not yet experiencing cuts).

Basically, what the judges are saying is that you cannot ask for relief before the adverse action occurs. Even though the hospitals knew the 30 percent rate reduction would be implemented Jan. 1, 2018, they had to wait until the pain was felt before they could ask for relief.

The Consequences

AHA does have the right to seek to seek certiorari (cert) to the U.S. Supreme Court. However, the Supreme Court receives requests for cert for approximately 7,000 cases per year, yet only hears about 80. The odds point to the COA decision standing.

AHA can re-file in District Court, but HHS will argue res judicata, which means the issue has already been decided.

AHA is not without remedy. Although it is not ideal, AHA and any adversely affected hospitals can appeal the rate reductions in administrative court.

In the meantime, HHS has stated that it will broaden the 340B rate cuts to all 340B-particpating entities. President Trump announced intent to continue with additional rate cuts. Congress has several pending proposed bills, both upholding and striking the rate cuts.

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