MEMORANDUM OPINION DENYING DEFENDANTS' MOTION TO
DISMISS; GRANTING PLAINTIFFS' MOTION FOR A PERMANENT
INJUNCTION; DENYING AS MOOT PLAINTIFFS' MOTION FOR A
PRELIMINARY INJUNCTION
RUDOLPH CONTRERAS UNITED STATES DISTRICT JUDGE
I.
INTRODUCTION
This
action concerns whether the Department of Health and Human
Services (“HHS”) acted lawfully when it reduced
Medicare payments worth billions of dollars to private
institutions, to correct what it views as a fundamental
misalignment of Medicare programs. Plaintiffs, a group of
hospital associations and non-profit hospitals,
[1]
contend that HHS exceeded its statutory authority when it cut
Medicare reimbursement rates for certain outpatient
pharmaceutical drugs by nearly 30%. Defendants, HHS and its
Secretary, contend that the rate adjustment was statutorily
authorized and necessary to close the gap between the
discounted rates at which Plaintiffs obtain the drugs at
issue-through Medicare's “340B Program”-and
the higher rates at which Plaintiffs were previously
reimbursed for those drugs under a different Medicare
framework.
Presently
before this Court are Plaintiffs' motion for a
preliminary or permanent injunction and Defendants'
motion to dismiss. Among other relief, Plaintiffs ask the
Court to vacate the Secretary's rate reduction, require
the Secretary to apply previous reimbursement rates for the
remainder of this year, and require the Secretary to pay
Plaintiffs the difference between the reimbursements they
have received this year under the new rates and the
reimbursements they would have received under the previous
rates. Defendants contest the Court's ability to hear the
case, arguing that Congress has shielded the Secretary's
action from judicial review, that the Secretary's
boundless discretion precludes review, and that
Plaintiffs' failure to exhaust their administrative
remedies is fatal. Defendants also argue that the
Secretary's action was well within his statutory
authority.
For the
reasons stated below, the Court concludes that it has
jurisdiction to provide relief in this case and that
Plaintiffs are entitled to such relief. While in certain
circumstances the Secretary could implement the rate
reduction at issue here, he did not have statutory authority
to do so under the circumstances presented. Moreover, because
the parties have fully and vigorously debated the merits of
Plaintiffs' claims, which turn on questions of law, not
fact, the Court concludes that further merits briefing would
be redundant and inefficient. However, while Plaintiffs are
entitled to some relief, the potentially drastic
impact of this Court's decision on Medicare's complex
administration gives the Court pause. Accordingly, the Court
grants Plaintiffs' motion for a permanent injunction and
orders supplemental briefing on the question of a proper
remedy.
II.
BACKGROUND AND PROCEDURAL HISTORY
A.
Medicare
Medicare
is a federal health insurance program for the elderly and
disabled, established by Title XVIII of the Social Security
Act. See 42 U.S.C. §§
1395-1395lll. Medicare Part A provides insurance
coverage for inpatient hospital care, home health care, and
hospice services. Id. § 1395c. Medicare Part B
provides supplemental coverage for other types of care,
including outpatient hospital care. Id. §§
1395j, 1395k. HHS's Outpatient Prospective Payment System
(“OPPS”), which directly reimburses hospitals for
providing outpatient services and pharmaceutical drugs to
Medicare beneficiaries, is a component of Medicare Part B.
See id. at 1395l(t). OPPS requires
“payments for outpatient hospital care to be made based
on predetermined rates.” Amgen, Inc. v. Smith,
357 F.3d 103, 106 (D.C. Cir. 2004). Under this system,
HHS-through the Centers for Medicare and Medicaid Services
(“CMS”)-sets annual OPPS reimbursement rates
prospectively, before a given year, rather than retroactively
based on covered hospitals' actual costs during that
year.[2]
B.
The 340B Program
In
1992, Congress established what is now commonly referred to
as the “340B Program.” Veterans Health Care Act
of 1992, Pub L. No. 102-585, § 602, 106 Stat. 4943,
4967-71. The 340B Program allows participating hospitals and
other health care providers (“covered entities”)
to purchase certain “covered outpatient drugs”
from manufacturers at or below the drugs'
“maximum” or “ceiling” prices, which
are dictated by a statutory formula and are typically
significantly discounted from those drugs' average
manufacturer prices. See 42 U.S.C. §
256b(a)(1)-(2).[3] Put more simply, this Program
“imposes ceilings on prices drug manufacturers may
charge for medications sold to specified health care
facilities.” Astra USA, Inc. v. Santa Clara
Cty., 563 U.S. 110, 113 (2011). It is intended to enable
covered entities “to stretch scarce Federal resources
as far as possible, reaching more eligible patients and
providing more comprehensive services.” H.R. Rep. No.
102-384(II), at 12 (1992); see also Medicare
Program: Hospital Outpatient Prospective Payment System and
Ambulatory Surgical Center Payment Systems and Quality
Reporting Programs (“2018 OPPS Rule”), 82 Fed.
Reg. 52, 356, 52, 493 & 52, 493 n.18 (Nov. 13, 2017)
(codified at 42 C.F.R. pt. 419).[4] Importantly, and as
discussed in greater detail below, the 340B Program allows
covered entities to purchase certain drugs at steeply
discounted rates, and then seek reimbursement for those
purchases under Medicare Part B at the rates established by
OPPS.
C.
Medicare Reimbursement Rates for 340B Drugs
The
statutory provision governing OPPS, codified at 42 U.S.C.
§ 1395l(t), imposes the framework by which HHS
must set prospective Medicare reimbursement rates. Among
other requirements under that provision, HHS must determine
how much it will pay for “specified covered outpatient
drugs” (“SCODs”) provided by hospitals to
Medicare beneficiaries. 42 U.S.C. §
1395l(t)(14)(A). SCODS are a subset of
“separately payable drugs, ” which are not
bundled with other Medicare Part B outpatient services and
are therefore reimbursed on a drug- by-drug basis. See
id. § 1395l(t)(14)(B). And as noted, the
340B Program covers certain separately payable drugs, some of
which are SCODs and some of which are not. 82 Fed. Reg. at
52, 496; Defs.' Mot. to Dismiss (“Defs.'
Mot.”) at 5, ECF No. 14.
Congress
has authorized two potential methodologies for setting SCOD
rates.[5] First, if HHS has certain “hospital
acquisition cost survey data, ” it must set the
reimbursement rate for each SCOD according to “the
average acquisition cost for the drug for that year
. . . as determined by the Secretary taking into
account” the survey data. 42 U.S.C. §
1395l(t)(14)(A)(iii)(I) (emphasis added). Second, if
the survey data is not available, each SCOD's
reimbursement rate must be set equal to “the
average price for the drug in the year established
under . . . section 1395w-3a . . . as calculated and adjusted
by the Secretary as necessary for purposes of this
paragraph.” Id. §
1395l(t)(14)(A)(iii)(II) (emphasis added). Section
1395w-3a, in turn, provides that a given drug's default
reimbursement rate is the average sales price
(“ASP”) of the drug plus 6%.[6] Id.
§ 1395w-3a(b)(1)(A)-(B); see also Medicare and
Medicaid Programs: Hospital Outpatient Prospective Payment
and Ambulatory Surgical Center Payment Systems and Quality
Reporting Programs (“2012 OPPS Rule”), 77 Fed.
Reg. 68, 210, 68, 387 (Nov. 15, 2012) (codified at 42 C.F.R.
pt. 419) (adopting a reimbursement rate of ASP plus 6% for
covered drugs in light of the “continuing uncertainty
about the full cost of pharmacy overhead and acquisition
cost” and the concern that deviating from the default
rate “may not appropriately account for average
acquisition and pharmacy overhead cost . . . .”).
D.
The 340B-Medicare Payment Gap
As
explained above, hospitals participating in the 340B Program
purchase 340B drugs at steeply discounted rates, and when
those hospitals prescribe the 340B drugs to Medicare
beneficiaries they are reimbursed by HHS at OPPS rates.
Before 2018, the relevant OPPS rate for 340B drugs was ASP
plus 6%. See, e.g., 77 Fed. Reg. at 68, 387. This
rate resulted in a significant gap between what hospitals
paid for 340B drugs and what they received in Medicare
reimbursements for those drugs, because the 340B Program
allowed participating hospitals to buy the drugs at a far
lower rate than ASP plus 6%. See 82 Fed. Reg. at 52,
495 (citing an Office of Inspector General report finding
that this margin “allowed covered entities to retain
approximately $1.3 billion in 2013”). Plaintiffs allege
that the revenues derived from this payment gap have
“helped [Plaintiffs] provide critical services to their
communities, including underserved populations in those
communities.” Pls.' Mem. Supp. Mot. Prelim. &
Permanent Inj. (“Pls.' Mem.”) at 31 (citing
Aff. of Tony Filer (“Northern Light Aff.”) ¶
13, Pls.' Mot. Prelim. & Permanent Inj.
(“Pls.' Mot.”) Ex. V, ECF No. 2-25; Aff. of
Robin Damschroder (“Henry Ford Aff.”)
¶¶ 15-18, Pls.' Mot. Ex. W, ECF No. 2-26; Aff.
of Wendi Barber (“Park Ridge Aff.”) ¶¶
15-17, Pls.' Mot. Ex. X, ECF No. 2-27), ECF No. 2-1. They
further allege that the narrowing of this gap
“threatens these critical services” because
Plaintiffs may be unable to fund the services with lower
reimbursement amounts. Id. (citing Northern Light
Aff. ¶¶ 14-19; Henry Ford Aff. ¶¶ 19-20;
Park Ridge Aff. ¶¶ 18-19).
E.
The 2018 OPPS Rule
In
mid-2017, HHS proposed reducing the Medicare reimbursement
rates for SCODs and other separately payable drugs acquired
through the 340B Program from ASP plus 6% to ASP minus 22.5%.
Medicare Program: Hospital Outpatient Prospective Payment and
Ambulatory Surgical Center Payment Systems and Quality
Reporting Programs, 82 Fed. Reg. 33, 558, 33, 634 (Jul. 20,
2017) (codified at 42 C.F.R. pt. 419). HHS provided a
detailed explanation of why it believed this rate reduction
was necessary. First, HHS noted that several recent studies
have confirmed the large “profit” margin created
by the difference between the price that hospitals pay to
acquire 340B drugs and the price at which Medicare reimburses
those drugs. See Id. at 33, 632-33. Second, HHS
stated that because of this “profit” margin, HHS
was “concerned that the current payment methodology may
lead to unnecessary utilization and potential overutilization
of separately payable drugs.” Id. at 33, 633.
It cited, as an example of this phenomenon, a 2015 Government
Accountability Office Report finding that Medicare Part B
drug spending was substantially higher at 340B hospitals than
at non-340B hospitals. Id. at 33, 632-33. The data
indicated that “on average, beneficiaries at 340B . . .
hospitals were either prescribed more drugs or more expensive
drugs than beneficiaries at the other non-340B hospitals in
GAO's analysis.” Id. at 33, 633. Third,
HHS 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, ” rather
than the lower 340B rate paid by the covered hospitals.
Id.
Thus,
HHS concluded that lowering the Medicare reimbursement rates
for 340B Program drugs would “make Medicare payment for
separately payable drugs more aligned with the resources
expended by hospitals to acquire such drugs[, ] while
recognizing the intent of the 340B program to allow covered
entities, including eligible hospitals to stretch scarce
resources while continuing to provide access to care.”
Id. HHS, however, did not have the data necessary to
“precisely calculate the price paid by 340B hospitals
for [any] particular covered outpatient drug.”
Id. at 33, 634. For that reason, HHS estimated 340B
hospitals' drug acquisition costs based on those
hospitals' average 340B discount. See Id.
Specifically, HHS proposed applying the average 340B discount
estimated by the Medicare Payment Advisory Commission
(“MedPAC”)-22.5% of a covered drug's average
sales price-to govern the 340B drug reimbursement rates.
See Id. HHS believed that MedPAC's estimate was
appropriate and, in fact, conservative because the
“actual average discount experienced by 340B hospitals
is likely much higher than 22.5[%].” Id.
In
addition to explaining its rationale and methodology for
reducing the 340B reimbursement rates to ASP minus 22.5%, HHS
stated its purported statutory basis for taking that action.
Because HHS did not “have hospital acquisition cost
data for 340B drugs, ” 82 Fed. Reg. at 33, 634, it
could not invoke its express authority under 42 U.S.C. §
1395l(t)(14)(A)(iii)(I) to set rates according to
the drugs' average acquisition costs. Instead, HHS
invoked its authority under §
1395l(t)(14)(A)(iii)(II), “which states that
if hospital acquisition cost data are not available, the
payment for an applicable drug shall be the average price for
the drug . . . as calculated and adjusted by the Secretary as
necessary.” 82 Fed. Reg. at 33, 634. HHS would thus
“adjust the applicable payment rate as necessary”
for separately payable drugs acquired under the 340B program,
“to ASP minus 22.5[%].” Id. HHS stated
that the adjustment was necessary because ASP minus 22.5%
“better represents the average acquisition cost for
[340B] drugs and biologicals.” Id.
Plaintiffs
strongly opposed the proposed 2018 340B reimbursement rates,
and they voiced their opposition in comments to the proposed
rule. Plaintiffs argued primarily that HHS did not have the
legal authority to change the 340B reimbursement rates in the
manner proposed, and that reducing reimbursement rates by
nearly 30% would severely impact covered entities'
ability to provide critical healthcare programs to their
communities, particularly to their underserved patients.
See generally AHA Comments, Pls.' Mot. Ex. C,
ECF No. 2-6; AAMC Comments, Pls.' Mot. Ex. D, ECF No.
2-7; AEH Comments, Pls.' Mot. Ex. E, ECF No. 2-8; Henry
Ford Comments, Pls.' Mot. Ex. F, ECF No. 2-9; Northern
Light Comments, Pls.' Mot. Ex. G, ECF No. 2-9.
Nevertheless,
in November 2017, HHS adopted the proposed 340B reimbursement
rate reduction. See 82 Fed. Reg. at 52, 362. In
issuing its final rule, HHS responded to Plaintiffs'
arguments about its authority to change Medicare
reimbursement rates for 340B drugs. See Id. at 52,
499. HHS argued that the Secretary's authority under
§ 1395l(t)(14)(A)(iii)(II) to “calculate
and adjust” drug payments “as necessary for
purposes of this paragraph” gave the Secretary broad
discretion, including discretion to adjust Medicare payment
rates according to whether or not certain drugs were acquired
at a significant discount. Id. HHS also disagreed
with commenters that the authority to “calculate and
adjust” drug rates as necessary was limited to
“minor changes”; it saw “no evidence in the
statute to support that position.” Id. at 52,
500. Accordingly, HHS used its purported authority “to
apply a downward adjustment that is necessary to better
reflect acquisition costs of [340B] drugs.”
Id. The 340B reimbursement rates dictated by this
rule, and its ASP minus 22.5% methodology, became effective
on January 1, 2018. Id. at 52, 356.
F.
Procedural History
In late
2017, Plaintiffs raised an Administrative Procedure Act
(“APA”) challenge to the 2018 OPPS Rule's
340B provisions. See generally Compl., Am. Hosp.
Ass'n v. Hargan (“AHA I”), No. 17-2447,
ECF No. 1 (D.D.C.). However, this Court dismissed the action
because Plaintiffs failed “to present any concrete
claim for reimbursement to the Secretary for a final
decision[, ]” which is “a fundamental
jurisdictional impediment to judicial review under 42 U.S.C.
§ 405(g).” AHA I, 289 F.Supp.3d 45, 55
(D.D.C. 2017).[7] Both parties agree that Plaintiffs have
now presented reimbursement claims covered by the 2018 OPPS
Rule, Defs.' Mot. at 15 n.6; Pls.' Mem. at 11-12, and
Plaintiffs have re-filed suit asserting nearly identical
challenges to the rule, see generally Compl., ECF
No. 1.
Plaintiffs
allege that the Secretary's reimbursement rate reduction
for 340B drugs violates the APA and the Social Security Act
because it is “arbitrary and capricious and contrary to
law, and in excess of the Secretary's authority under the
Medicare provisions of the Social Security Act.” Compl.
¶¶ 68-69 (citing 42 U.S.C. §§ 405(g),
1395ii, 1395l(t)(14)(A)(iii); 5 U.S.C. §
706(2)). In conjunction with filing their complaint,
Plaintiffs have moved for either a preliminary injunction or
a permanent injunction under Rule 65 of the Federal Rules of
Civil Procedure. Pls.' Mot. at 1, ECF No. 2. Plaintiffs
request that this Court direct the Secretary to:
[S]trike the changes in the payment methodology for 340B
drugs from the OPPS Rule and use the methodology used in
calendar year 2017 for all future 340B Program payments in
2018; pay the Hospital Plaintiffs and all provider members of
the Association Plaintiffs the difference between the
payments for 340B drugs that they received under the 2018
OPPS Rule and the payments they would have received under the
2017 OPPS Rule; and conform the payment methodology that they
use for 340B drugs in calendar year 2019 and subsequent years
to the requirements of the Social Security Act, and
specifically not to use acquisition cost to calculate payment
rates unless Defendants have complied with 42 U.S.C. §
1395l(t)(14)(A)(iii)(I).
Pls.' Mem. at 35. The government has opposed
Plaintiffs' motion and filed a motion to dismiss the
action pursuant to Federal Rules of Civil Procedure 12(b)(1)
and 12(b)(6). See generally Defs.' Mot. The
parties' motions are fully briefed and ripe for this
Court's consideration.
III.
LEGAL STANDARDS
A.
Federal Rule of Civil Procedure 12(b)(1)
A
motion to dismiss under Federal Rule of Civil Procedure
12(b)(1) “presents a threshold challenge to the
Court's jurisdiction.” Curran v. Holder,
626 F.Supp.2d 30, 32 (D.D.C. 2009) (quoting Agrocomplect,
AD v. Republic of Iraq, 524 F.Supp.2d 16, 21 (D.D.C.
2007)). “It is to be presumed that a cause lies outside
[the federal courts'] limited jurisdiction, and the
burden of establishing the contrary rests upon the party
asserting jurisdiction.” Kokkonen v. Guardian Life
Ins. Co. of Am., 511 U.S. 375, 377 (1994) (citing
McNutt v. Gen. Motors Acceptance Corp., 298 U.S.
178, 182-83 (1936); Turner v. Bank of N.A., 4 U.S.
8, 11 (1799)). In determining whether the plaintiff has met
this burden, a court must accept “the allegations of
the complaint as true, ” Banneker Ventures, LLC v.
Graham, 798 F.3d 1119, 1129 (D.C. Cir. 2015), and
“construe the complaint ‘liberally,' granting
the plaintiff ‘the benefit of all inferences that can
be derived from the facts alleged, '” Barr v.
Clinton, 370 F.3d 1196, 1199 (D.C. Cir. 2004) (quoting
Kowal v. MCI Commc'ns. Corp., 16 F.3d 1271, 1276
(D.C. Cir.1994)). However, “the [p]laintiff's
factual allegations in the complaint . . . will bear closer
scrutiny in resolving a 12(b)(1) motion than in resolving a
12(b)(6) motion for failure to state a claim.”
Grand Lodge of Fraternal Order of Police v.
Ashcroft, 185 F.Supp.2d 9, 13-14 (D.D.C. 2001) (internal
quotation marks omitted) (citing 5A Charles A. Wright &
Arthur R. Miller, Federal Practice and Procedure
§ 1350).
The
Court must confirm its jurisdiction for each type of claim
brought before it, including APA challenges. Indeed, while
the “APA generally establishes a cause of action for
those suffering legal wrong because of agency action, or
adversely affected or aggrieved by agency action, ” the
“APA does not apply . . . to the extent that . . .
statutes preclude judicial review.” Tex. All. for
Home Care Servs. v. Sebelius, 681 F.3d 402, 408 (D.C.
Cir. 2012) (internal quotation marks omitted) (quoting 5
U.S.C. § 701(a)(1); Koretoff v. Vilsack, 614
F.3d 532, 536 (D.C. Cir. 2010)). Similarly, courts lack
jurisdiction over claims brought under the Social Security
Act until the claimants have exhausted their administrative
remedies and received final decisions from the Secretary
regarding the issues underlying those claims. 42 U.S.C.
§ 405(g).
B.
Federal Rule of Civil Procedure 12(b)(6)
The
Federal Rules of Civil Procedure require that a complaint
contain “a short and plain statement of the
claim” to give the defendant fair notice of the claim
and the grounds upon which it rests. Fed.R.Civ.P. 8(a)(2);
accord Erickson v. Pardus, 551 U.S. 89, 93 (2007)
(per curiam). A motion to dismiss under Rule 12(b)(6) does
not test a plaintiff's ultimate likelihood of success on
the merits; rather, it tests whether a plaintiff has properly
stated a claim. See Scheuer v. Rhodes, 416 U.S. 232,
236 (1974), abrogated on other grounds by Harlow v.
Fitzgerald, 457 U.S. 800 (1982). A court considering
such a motion presumes that the complaint's factual
allegations are true and construes them liberally in the
plaintiff's favor. See, e.g., United States
v. Philip Morris, Inc., 116 F.Supp.2d 131, 135 (D.D.C.
2000).
To
survive a motion to dismiss, a complaint need not contain all
elements of a prima facie case. See Swierkiewicz v.
Sorema N.A., 534 U.S. 506, 511-14 (2002); Bryant v.
Pepco, 730 F.Supp.2d 25, 28-29 (D.D.C. 2010). However,
the “complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is
plausible on its face.'” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570 (2007)). This means
that a plaintiff's factual allegations “must be
enough to raise a right to relief above the speculative
level, on the assumption that all the allegations in the
complaint are true (even if doubtful in fact).”
Twombly, 550 at 555 (citations omitted).
“Threadbare recitals of the elements of a cause of
action, supported by mere conclusory statements, ” are
therefore insufficient to withstand a motion to dismiss.
Iqbal, 556 U.S. at 678. A court need not
accept a plaintiff's legal conclusions as true, see
id., nor must a court presume the veracity of legal
conclusions couched as factual allegations, see
Twombly, 550 U.S. at 555.
C.
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