340B remedy payments

Historically, under the 340B program for Medicare hospital outpatient drugs, Medicare set payments at 106% of the average sales price (ASP). However, CMS revised the payments to ASP less 22.5% starting in 2018 in order to more accurately reflect the actual costs incurred by participating hospitals. At the same time, because CMS is required to make outpatient payments on a budget neutral basis, it increased payments for all other outpatient services to all hospitals.

The American Hospital Association challenged the rate cuts as inconsistent with the Medicare statute. In 2022, the Supreme Court found the ASP less 22.5% payment methodology to be contrary to law because CMS had failed to conduct a survey of hospitals’ acquisition costs for outpatient drugs before reducing the reimbursement rate as required by the statute. The Court did not, however, vacate the prior rules and remanded the case to the district court for the determination of a proper remedy. On remand, the district court vacated the payment rules prospectively from September 28, 2022 and required CMS to start paying hospitals under the original methodology as of that date. At the same time, the district court did not vacate the regulations establishing the payment reductions for the period prior to September 28, 2022, and instead remanded the matter to CMS to determine the appropriate remedy.

In July 2023, CMS issued a final rule to address the remedy payments. Under the final rule, CMS will make lump sum payments to hospitals to remedy CMS’s legal error and restore the hospitals to as close to the position they would have been in without this change to the reimbursement rate from 2018 through September 28, 2022. In addition, because CMS increased all outpatient payments to all hospitals, CMS will be reducing outpatient payments starting in 2026 for approximately 16 years. Importantly, CMS stated that the impact of the final rule on MAOs was outside the scope of rulemaking and CMS simply reminded MAOs that they need to pay non-contracted providers the same amount as original Medicare.

Some hospitals have already started to issue demands to MAOs for similar lump sum payments. Similar to sequestration, contracted plan providers need to analyze their contracts to determine if they have a contractual obligation to make these payments. For non-contracted providers, things get a little trickier, but plans still have arguments, including that their obligations are to make claims payments at Medicare rates and not lump sum payments to remedy a legal error by CMS. Other potential defenses against claims brought by non-contracted providers include exhaustion and preemption.

Finally, MAOs facing litigation need to consider potential counterclaims against hospitals for the increased outpatient payments, which CMS referred to repeatedly as a “windfall” during rulemaking.