Am. Hosp. Ass'n v. Azar

• Decision Date: 27 December 2018
• Docket Number: Civil Action No.: 18-2084 (RC)
• Citation: 348 F.Supp.3d 62
• Parties: The AMERICAN HOSPITAL ASSOCIATION, et al., Plaintiffs, v. Alex M. AZAR II, United States Secretary of Health and Human Services, et al., Defendants.
• Court: U.S. District Court — District of Columbia

348 F.Supp.3d 62

The AMERICAN HOSPITAL ASSOCIATION, et al., Plaintiffs,

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

Civil Action No.: 18-2084 (RC)

United States District Court, District of Columbia.

Signed December 27, 2018

Ezra Marcus, William Barnett Schultz, Zuckerman Spaeder, LLP, Washington, DC, for Plaintiffs.

Justin Michael Sandberg, U.S. Department of Justice, Civil Division, Federal Programs Branch, Washington, DC, for Defendants.

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, 131 S.Ct. 1342, 179 L.Ed.2d 457 (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...