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The American Hospital Association v. Hargan

United States District Court, District of Columbia

December 29, 2017

ERIC D. HARGAN, Acting Secretary, Department of Health and Human Services, et al. Defendants.




         This case represents a dispute between certain public and not-for-profit hospitals and the Department of Health and Human Services (“HHS”) over the rates at which Medicare will begin reimbursing them for pharmaceuticals that they acquire through a federal program known as the 340B Program. Although the 340B Program has enabled eligible hospitals to purchase pharmaceuticals from manufacturers at discounts, Medicare has historically reimbursed those hospitals at rates that were significantly higher than acquisition costs. Healthcare providers, including Plaintiffs, claim that they have used this surplus to provide additional healthcare services to communities with vulnerable populations. But in 2017, the Centers for Medicare and Medicaid Services (“CMS”), a component of HHS, issued a regulation which was designed to begin closing the gap between what hospitals were paying for drugs and the rates at which Medicare reimbursed those hospitals.

         Plaintiffs in this action, three hospital associations and three of their member hospitals, contend that the Medicare reimbursement rate for 340B drugs is set by statute and that the Secretary exceeded his authority when he “adjusted” that statutory rate downward by nearly 30%. Compl. ¶¶ 47-49, ECF No. 1. In order to preserve the status quo, Plaintiffs now seek a preliminary injunction directing HHS and the Acting Secretary not to implement these provisions pending the resolution of this lawsuit and any appeal. Pls.' Mot. Prelim. Inj., ECF No. 2. In response, Defendants, HHS and the Acting Secretary, have opposed this motion and have themselves moved to dismiss the action pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted. See Defs.' Mot. Dismiss, ECF No. 17. For the reasons stated below, the Court concludes that it lacks subject matter jurisdiction because Plaintiffs have failed to present any claim to the Secretary for final decision as required by 42 U.S.C. § 405(g). Accordingly, the Court grants Defendants' motion to dismiss and denies Plaintiffs' motion for preliminary injunction as moot.


         A. The 340B Program

         In 1992, Congress established what is now commonly referred to as the “340B Program.” Pub. L. 102-585. This program was intended to enable certain hospitals and clinics “to stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” H.R. Rep. 102-384(II), at 12 (1992). To do this, it allowed participating hospitals and other health care providers to purchase certain “covered outpatient drugs” at discounted prices from manufacturers. See 42 U.S.C. § 256b. Under this program, participating drug manufacturers agree to offer certain covered outpatient drugs to “covered entities” at or below a “maximum” or “ceiling” price, which is calculated pursuant to a statutory formula. See 42 U.S.C. § 256b(a)(1)-(2).

         B. Setting Medicare Reimbursement Rates for 340B Drugs

         Medicare is a federal health insurance program for the elderly and disabled. See 42 U.S.C. §§ 1395 et seq. Part A of Medicare provides insurance coverage for inpatient hospital care, home health care, and hospice services. Id. at § 1395c. Part B, provides supplemental coverage for other types of care, including outpatient hospital care. Id. at §§ 1395j, 1395k.

         One component of Medicare Part B is the Outpatient Prospective Payment System (“OPPS”), which pays hospitals directly to provide outpatient services to beneficiaries. See id. at § 1395l(t). Under this system, hospitals are paid prospectively for their services for each upcoming year. As part of the annual determination of OPPS rates, CMS must also determine how much Medicare will pay for “specified covered outpatient drugs” (“SCODs”). See id. at § 1395l(t)(14). Importantly, some of these SCODs include outpatient drugs that hospitals purchase pursuant to the 340B Program.

         Under the statutory scheme applicable here, Congress has authorized two potential methods of setting SCOD rates. First, if available, the payment rates must be set using “the average acquisition cost for the drug for that year.” Id. at § 1395l(t)(14)(iii)(I). If that data is not available, however, then the payment rates must be set equal to “the average price for the drug in the year established under [certain other statutory provisions] . . . as calculated and adjusted by the Secretary as necessary for purposes of this paragraph.” Id. at § 1395l(t)(14)(iii)(II). For 2018, the applicable provision was 42 U.S.C. § 1395w-3a, which specified that the payment rate should be the “average sales price” for the drug plus six percent (“ASP 6%”). See Id. at § 1395w-3a(b).

         C. The 2018 OPPS Rule

         On July 13, 2017, CMS issued a proposed rule for OPPS rates for the Calendar Year 2018. Medicare Program: Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs, 82 Fed. Reg. 33, 558 (Jul. 20, 2017). In addition to updating the OPPS rates for 2018, CMS also proposed changing the way Medicare would pay hospitals for SCODs acquired through the 340B Program. See Id. at 33, 634. In its proposed rule, CMS noted that several studies in recent years had shown that the difference between the price that hospitals paid to acquire 340B drugs and the amount that Medicare reimbursed hospitals for those drugs was significant. See Id. at 33, 632-33. For example, in 2015, the Medicare Payment Advisory Commission (“MedPAC”) estimated that, on average, “hospitals in the 340B program ‘receive[d] a minimum discount of 22.5 percent of the [average sales price] for drugs paid under the [OPPS], ” yet hospitals were being reimbursed at a rate of ASP 6%. Id. at 33, 632 (second alteration in original). The MedPAC report also observed drug spending increases correlated with hospitals' participation in the 340B Program. Id. Moreover, the number of hospitals participating in the 340B Program was only going higher. Id. at 33, 633.

         “Given the growth in the number of providers participating in the 340B program and recent trends in high and growing prices of several separately payable drugs administered under Medicare Part B to hospital outpatients, [CMS] believe[d] it [was] timely to reexamine the appropriateness of continuing to pay the current OPPS methodology of ASP 6 percent to hospitals that have acquired those drugs under the 340B program at significantly discounted rates.” Id. CMS also expressed concern “about the rising prices of certain drugs and that Medicare beneficiaries, including low-income seniors, are responsible for paying 20 percent of the Medicare payment rate for these drugs.” Id. ...

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