Health Law Daily HHS had the authority to reduce 340B hospital SCOD rates by 28.5 percent
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Monday, August 3, 2020

HHS had the authority to reduce 340B hospital SCOD rates by 28.5 percent

By Jeffrey H. Brochin, J.D.

Congress granted HHS the authority to adjust SCOD payment rates for the 2018 OPPS year for hospitals participating in the 304B drug discount program, and HHS’s interpretation of the statute was reasonable.

A federal appeals court in the District of Columbia has reversed the decision of the trial court that ruled that HHS exceeded its statutory authority to adjust the payment rate for certain drugs covered by Medicare Part B, known as "specified covered outpatient drugs" or SCODs. In reversing the trial court, the appeals court found that HHS reasonably interpreted the statute to reduce the SCOD reimbursement payment rate for 340B hospitals that received a 20 to 50 percent price reduction for those drugs, and by paying them the same rate as that of non-340B hospitals, they would have profited from the SCOD payments (American Hospital Association v. Azar, July 31, 2020, Srinivasan, S.).

HHS’s discretion to adjust OPPS rates. HHS annually establishes Medicare Part B reimbursement rates using the Outpatient Prospective Payment System (OPPS), which requires HHS to fix the amounts it will pay providers for certain services before the year begins. Congress moved to that prospective system to enhance HHS’s ability to control Part B costs. However, OPPS limited HHS’s discretion in calculating those amounts, and set out a specific methodology for calculating payment rates using the average price for the drug as established by a separate, statute. Under a subclause of the statute, HHS was permitted to adjust that price metric "as necessary."

Change to two-track rates. In 2017, HHS announced SCOD payment rates for the upcoming 2018 OPPS year, and invoking its subclause authority to "adjust" the average price metric, HHS for the first time established two separate rates: one rate for hospitals participating in the 340B program drug discount program, and another rate for all other hospitals. The rate for non-340B hospitals remained at average sales price (ASP) ASP plus 6 percent, or 106 percent of ASP. The rate for 340B hospitals however was adjusted down to ASP minus 22.5 percent, or 77.5 percent of ASP.

HHS reduced the rate for the 340B hospitals, because they received a significant 20 to 50 percent discount on those drugs from the manufacturers, and to pay them the same reimbursement rate as hospitals paying the ASP, would have yielded a windfall profit for the 340B hospitals. After the district court ruled in favor of the hospitals, HHS appealed.

Authority to impose 28.5 percent SCOD rate cut. The appeals court noted that the sole question before them was whether HHS had statutory authority to impose its 28.5 percent cut to SCOD reimbursement rates for 340B hospitals. HHS based its authority in subclause (II) of paragraph (14) of the OPPS statute, pursuant to which when HHS sets SCOD payment amounts tethered to ASPs, it has the express authority to adjust the amounts as necessary for purposes of that paragraph. The appeals court agreed with HHS, finding that the agency reasonably interpreted subclause (II)’s adjustment authority to enable reducing SCOD payments to 340B hospitals, so as to avoid reimbursing those hospitals at much higher levels than their actual costs to acquire the drugs.

HHS properly established SCOD reimbursement rates for 340B hospitals through notice-and-comment rulemaking and also explained why it believed that its proposal was within its statutory authority to promulgate. Accordingly, the appeals court found that HHS’s understanding of its statutory authority was entitled to Chevron deference.

A fair measure of parity. The court further explained that HHS’s 28.5 percent SCOD rate reduction for 340B hospitals was a fair, or even conservative, measure of the reduction needed to bring payments to those hospitals into parity with their costs to obtain the drugs. Absent the reduction, at least some Medicare beneficiaries served by 340B hospitals (generally underserved populations) would have had to pay out-of-pocket copayments for the drugs that substantially exceeded the normal copay share of providers’ cost to obtain the drugs—with beneficiaries’ copayments sometimes exceeding 340B hospitals’ full cost to purchase the drugs.

Because the appeals court could not conclude that the statute foreclosed HHS from reducing SCOD reimbursement rates for 340B hospitals, with the object of bringing payments into alignment with acquisition costs, they reversed the decision of the trial court.

The case is No. 19-5048.

Attorneys: William Barnett Schultz (Zuckerman Spaeder LLP) for American Hospital Association. Alisa B. Klein, U.S. Department of Justice, for Alex Michael Azar, II and United States Department of Health and Human Services.

Companies: American Hospital Association; United States Department of Health and Human Services

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