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American Hospital Association v. Azar

United States District Court, District of Columbia

May 6, 2019

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


          Rudolph Contreras, United States District Judge.


         This Court previously held that the Department of Health and Human Services (“HHS”) exceeded its statutory authority when it reduced the 2018 Medicare reimbursement rate for certain pharmaceutical drugs-those covered by the “340B Program”-by nearly 30%. In that decision, the Court asked the parties to provide supplemental briefing regarding the appropriate remedy. That briefing is now ripe for the Court's consideration. Plaintiffs, a group of hospital associations and non-profit hospitals, [1] have also filed a supplemental complaint raising a new claim. They contend that HHS once again exceeded its statutory authority when it implemented the same 340B reimbursement rate for 2019 that the Court held was unlawfully implemented in 2018.[2]

         For the reasons stated below, the Court concludes that HHS's 2019 340B reimbursement rate is unlawful, for the same reasons that the 2018 rate was unlawful. The Court also concludes that, despite the fatal flaw in the agency's rate adjustments, vacating HHS's 2018 and 2019 rules is not the best course of action, given the havoc vacatur may wreak on Medicare's administration. Rather, the Court will remand the two rules to the agency, giving it the first crack at crafting appropriate remedial measures. The Court expects HHS to resolve this issue promptly.


         This Court's most recent opinion contains a detailed discussion of this case's background and procedural history, and the relevant statutes and regulations. See Am. Hosp. Assoc. v. Azar (“AHA”), 348 F.Supp.3d 62, 66-72 (D.D.C. 2018). The Court will briefly summarize the relevant background here.

         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.[3] Medicare Part A provides 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 outpatient services and pharmaceutical drugs provided 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, the Secretary-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.[4]

         Medicare Part B reimburses, among other products and services, “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). Congress has authorized two potential methodologies for setting SCOD rates. First, if the Secretary has certain “hospital acquisition cost survey data, ” he 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. Id. § 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 [sales] price [(“ASP”)] 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%.[5]

         The Secretary applies the same methodologies used to set SCOD reimbursement rates to set rates for separately payable drugs covered by the “340B Program.”[6] See Veterans Health Care Act of 1992, Pub L. No. 102-585, § 602, 106 Stat. 4943, 4967-71. The 340B 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); see also 42 U.S.C. § 256b(a)(1)-(2).[7] The statutory provisions that establish those price ceilings are independent from the statutory provisions that establish Medicare reimbursement rates. Put another way, the 340B Program caps the prices that eligible providers pay for covered drugs, but Medicare Part B sets the reimbursement rates those providers receive for prescribing covered drugs to Medicare beneficiaries. Until recently, there was a significant spread between 340B prices and Medicare reimbursement rates. 340B Program participants could purchase drugs at steeply discounted rates under the Program, then seek reimbursement for those purchases at the higher Medicare Part B rates established by OPPS. The Secretary's attempt to narrow the spread triggered this litigation.

         In mid-2017, the Secretary proposed reducing reimbursement rates for SCODs and other 340B drugs, 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). The Secretary asserted that this change was necessary to “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. at 33, 633.

         The Secretary's statutory authority to reduce the 2018 340B rate was limited by the data available to him. Because he did not “have hospital acquisition cost data for 340B drugs, ” 82 Fed. Reg. at 33, 634, he could not invoke his express authority under 42 U.S.C. § 1395l(t)(14)(A)(iii)(I) to set rates according to the drugs' average acquisition costs. Instead, he invoked subsection (t)(14)(A)(iii)(II), which allows him to set rates according to the drugs' average sales prices, “as calculated and adjusted by the Secretary as necessary.” 82 Fed. Reg. at 33, 634. The Secretary proposed to “adjust the applicable payment rate as necessary” for separately payable 340B drugs, “to ASP minus 22.5[%].” Id. According to the Secretary, the adjustment was necessary because ASP minus 22.5% was the average 340B discount estimated by the Medicare Payment Advisory Commission (“MedPAC”), and thus “better represents the average acquisition cost for [340B] drugs and biologicals.” Id. Plaintiffs objected to this adjustment, but the Secretary rejected their objections and adopted the proposal. See Medicare Program: Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs (“2018 OPPS Rule”), 82 Fed. Reg. 52, 356, 52, 362 (Nov. 13, 2017) (codified at 42 C.F.R. pt. 419). HHS reimbursed 340B drugs at ASP minus 22.5% throughout 2018.

         Having failed to defeat the 2018 340B rate adjustment during the notice and comment period, Plaintiffs challenged the 2018 OPPS Rule in this Court. See AHA, 348 F.Supp.3d at 71- 72. They argued that the Secretary exceeded his statutory authority in setting the 2018 340B rate, in violation of the Administrative Procedure Act (“APA”) and the Social Security Act. See Id. at 71. This Court agreed. It held that the Secretary violated subsection (t)(14)(A)(iii)(II)'s plain text when he invoked that provision to “adjust” 340B rates downward by 30%, based not on the drugs' average sales prices-as dictated by the statutory text-but on the drugs' estimated acquisition costs. See Id. at 79-83. The Court ordered the parties to provide supplemental briefing on the proper remedy. See Id. at 86.

         The Secretary has continued to apply the same 340B rate in 2019. See Medicare Program: Changes to Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs (“2019 OPPS Rule”), 83 Fed. Reg. 58, 818, 58, 979 (Nov. 21, 2018) (codified at 42 C.F.R. pt. 419). And in adopting that rate, the Secretary incorporated by reference his rationale for adopting the 2018 340B rate, the rationale that this Court later held was contrary to law. See Id. at 58, 981 (referring commenters to the Secretary's “detailed response regarding [his] statutory authority to require payment reductions for [340B drugs] in the CY 2018 OPPS/ASC final rule”).

         Plaintiffs have filed a supplemental complaint, see Suppl. Compl., ECF No. 39, and moved to permanently enjoin the 2019 OPPS Rule, see Pls.' Mot. Permanent Inj. Covering 2019 OPPS Rule (“Pls.' Mot. Inj.”), ECF No. 35. That motion, and the parties' remedies briefing, is now ripe for the Court's review. The Court will first consider Plaintiffs' motion to enjoin the 2019 OPPS Rule, then the parties' remedies briefing. It grants Plaintiffs' motion in part, and remands both the 2018 and 2019 OPPS Rules to HHS, giving the Secretary the first crack at crafting an appropriate remedy.


         Rather than fully briefing Plaintiffs' motion to enjoin the 2019 OPPS Rule, the parties have elected to incorporate by reference their arguments regarding the 2018 OPPS Rule.[8]Plaintiffs proffer that “[f]or all of the reasons that the Court has already articulated with respect to the 2018 OPPS Rule, the 2019 OPPS Rule is ultra vires and unlawful.”[9] Pls.' Mot. Inj. at 2. Defendants respond that their arguments for denying Plaintiffs' challenge to the 2018 OPPS Rule “provide ample bases for rejecting” Plaintiffs' challenge to the 2019 OPPS Rule. Defs.' Opp'n Pls.' Mot. Inj. at 1, ECF No. 42. Recognizing that the Court “rejected those arguments in the context of the 2018 OPPS Rule, ” Defendants “respectfully request that the Court reconsider its conclusion.” Id. at 2. The Court declines Defendants' invitation. It enjoins the 2019 OPPS Rule for the same reason that it enjoined the 2018 OPPS Rule. In the interest of thoroughness, the Court will briefly summarize that reasoning.

         First, Plaintiffs have sufficiently exhausted their administrative remedies, such that they may challenge the 2019 OPPS Rule in federal court. To seek judicial review, a plaintiff challenging a Medicare-related agency action must satisfy two requirements established by 42 U.S.C. § 405(g). See Shalala v. Ill. Council on Long Term Care, Inc., 529 U.S. 1, 12-15 (2000). First, a jurisdictional, non-waivable “requirement that a claim for benefits shall have been presented to the Secretary.” Mathews v. Eldridge, 424 U.S. 319, 328 (1976). Second, a non-jurisdictional “requirement that the administrative remedies prescribed by the Secretary be exhausted.” Id. This second requirement may be waived by the agency or a court. See id. at 330. Together, the two requirements serve the practical purpose of “assur[ing] the agency greater opportunity to apply, interpret, or revise policies, regulations, or statutes.” Ill. Council, 529 U.S. at 13.

         Plaintiffs satisfied § 405(g)'s first, non-waivable requirement when Henry Ford Hospital presented HHS with two claims for reimbursement for 340B drugs prescribed under the 2019 OPPS Rule. See ECF Nos. 34-1 & 34-2. In response, HHS dutifully applied the 2019 340B reimbursement rate challenged by Plaintiffs: ASP minus 22.5%.[10] Id. Defendants do not contest that Henry Ford Hospital's 2019 claims satisfy § 405(g)'s presentment requirement.

         Plaintiffs need not satisfy § 405(g)'s second requirement, that they fully exhaust the administrative process, because exhaustion would be futile. As this Court previously noted, plaintiffs need not exhaust their administrative remedies when “(1) the issue raised is entirely collateral to a claim for payment; (2) plaintiffs show they would be irreparably injured were the exhaustion requirement enforced against them; [or] (3) exhaustion would be futile.” AHA, 348 F.Supp.3d at 75 (alteration in original) (quoting Triad at Jeffersonville I, LLC v. Leavitt,563 F.Supp.2d 1, 16 (D.D.C. 2008)); see also Tataranowicz v. Sullivan, 959 F.2d 268, 274 (D.C. Cir. 1992). In such circumstances, a “district court may, in its discretion, excuse exhaustion if ‘the litigant's interests in immediate judicial review outweigh the government's interests in the efficiency or administrative autonomy that the exhaustion doctrine is designed to further.'” Avocados Plus Inc. v. Veneman,370 F.3d 1243, 1247 (D.C. Cir. 2004) (quoting McCarthy v. Madigan,503 U.S. 140, 146 (1992)). More specifically, the court must consider whether judicial resolution of ...

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