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The American Hospital Association v. Azar

United States District Court, District of Columbia

December 27, 2018

ALEX M. AZAR II, United States Secretary of Health and Human Services, et al., Defendants.




         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.


         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.


         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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