CMS Proposal to Make One-Time $9 Billion Lump Sum Payment to 340B-Covered Entity Hospitals

The Centers for Medicare & Medicaid Services (“CMS”) recently announced its proposal to make a one-time lump sum payment of roughly $9 billion to 340B-covered entity hospitals that were impacted by the agency’s unlawful reimbursement reductions for 340B drugs billed to Medicare Part B from 2018 to 2022. This proposal comes after the Supreme Court sided with affected 340B participating hospitals last June in American Hospital Association v. Becerra, ruling that the government must provide a remedy to the approximately 1,600 impacted hospitals for historical amounts owed.

The authority for these payments comes from proposed rule CMS 1793-P (“Hospital Outpatient Prospective Payment System: Remedy for the 340B-Acquired Drug Payment Policy for Calendar Years 2018-2022”), which will be formally published on the Federal Register’s website on July 11, 2023. The rule has a stakeholder comment period ending on September 5, 2023. Pending any changes to the proposed rule, we expect CMS to begin making this lump-sum payment shortly after the proposed rule is finalized, likely later this year.

In an effort to remain budget neutral, CMS’s proposal involves offsetting the majority of the proposed lump sum repayments with corresponding hospital reimbursement cuts for services and non-drug items, although these cuts would be spread over approximately 16 years.

While hospital entities and advocacy groups have initially stated appreciation for the lump sum format of the repayments owed, there is some disappointment that the repayments do not include interest, and that CMS proposed corresponding repayment cuts that impact 340B and non-340B hospitals alike.

Continuing Changes in the 340B Space: New Restrictions and Shifting Alliances

As detailed further in our article on the current state of the 340B Program and what to expect in 2023, a growing list of manufacturers have taken the step of significantly restricting 340B pricing for fills completed by contract pharmacies. Over the last few weeks, the number and scope of these restrictions have only continued to grow. Most notably, on February 15, 2023, Johnson & Johnson (“J&J”) released an updated policy with the most restrictive terms yet, limiting 340B hospitals to receiving 340B pricing at only one contract pharmacy location within 40 miles of the hospital, effectively eliminating the possibility of utilizing most mail order or specialty pharmacies for J&J 340B fills via a contract pharmacy arrangement. Moreover, if a hospital covered entity wants to obtain 340B pricing for a single contract pharmacy location, J&J now requires such hospitals to submit 340B claims data to 340B ESP for the hospital’s entity-owned pharmacies (if applicable). This is the first such manufacturer policy to require claim data submission outside of the contract pharmacy space.

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The Current State of 340B and What to Expect in 2023

2022 was an eventful year on the 340B front, packed with updates to consequential litigation, proposed new rules, ongoing uncertainty into the Health Resources and Services Administration’s (HRSA) underlying enforcement authority, and changes to 340B-related laws on the state level. We saw the Supreme Court side with 340B hospitals in a significant $1.6 billion Medicare Part B drug payment ruling. There were developments in the impactful Genesis case regarding the definition of a 340B-eligible patient. We saw multiple states either enact or propose anti-discrimination laws restricting the ability of payors and pharmacy benefit managers (PBMs) to reimburse 340B-eligible claims at a lower rate. HRSA proposed a revised ADR rule outlining a more informal dispute resolution process. We saw the continuation of litigation surrounding manufacturers’ 340B pricing restrictions for prescriptions filled at contract pharmacy locations. Given the multitude of developments in 2022, we expect 2023 to be another action-packed year for 340B covered entities and stakeholders. Below, we discuss the 340B issues to track and where additional developments are likely to occur.

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Brenda Shafer, Michael French and Richard Davis Author Law360 Article on Questions Related to Section 340B Drug Pricing

Quarles Health & Life Sciences attorneys Brenda Shafer, Michael French and Richard Davis recently wrote an article for Law360 about questions surrounding the ability of the Health Resources and Services Administration’s ability to enforce key requirements related to the Section 340B drug pricing program.

In the article, Shafer, French and Davis address aspects of the 340B program such as manufacturer contract pharmacy pricing restrictions and associated litigation, Section 340B PBM anti-discrimination laws and Section 340B HRSA audit trends.

An excerpt from the article:

The Section 340B program, Public Health Service Act Section 340B, Title 42 of the U.S. Code, Section 256b, allows qualifying safety net providers to purchase certain outpatient medications at significant discounts. Savings resulting from program participation are significant and relied upon by participating hospitals and clinics to serve their patient populations more effectively.

The HRSA primarily defined the contours of the 340B program, especially those related to contract pharmacy relationships, through subregulatory guidance documents and FAQs.

Until late 2019, Section 340B stakeholders operated within the parameters of this subregulatory guidance. However, in late 2019, the HRSA appeared to question and reevaluate its own enforcement authority based on Executive Order 13892, which was geared toward limiting the prevalence and enforceability of administrative guidance documents promulgated outside of the formal rule making process.

With this regulatory background in mind, four recent developments in the Section 340B space are discussed below, with guidance about what each means for your clients.

340B Program Changes on the Horizon? Start Planning Now for Potentially Seismic Impact of Upcoming Genesis Decision

As the extensively covered Genesis Healthcare, Inc. v. Azar case continues to proceed, 340B covered entities expect to soon receive much-anticipated clarification on what can reasonably constitute a 340B eligible patient. In the meantime, covered entities should begin planning and strategizing now for how such a significant change to the 340B Program would impact its 340B services and operations.

Genesis Healthcare, Inc. v. Azar is an ongoing case that arose from a 2017 Health Resources and Services Administration (“HRSA”) audit and subsequent exclusion of the covered entity from the 340B Program on February 14, 2018. HRSA’s audit determined that Genesis Healthcare (“Genesis”), a system of 340B-participating Federally Qualified Health Centers (FQHCs), was no longer eligible to participate in the 340B Program because it was dispensing 340B drugs to individuals who were not 340B-eligible “patients” of Genesis (i.e., 340B diversion). Genesis filed suit a few months later in June 2018, arguing that HRSA’s interpretation of an eligible “patient” was not aligned with the 340B statute itself1 and was instead based on nonbinding, sub-regulatory guidance originally released in 1996.2 In apparent response to the lawsuit, HRSA allowed Genesis back in to the 340B Program on September 24, 2018, but continued to insist that Genesis comply with the more restrictive 1996 eligible patient guidance. Genesis filed an amended complaint, alleging that HRSA continued to seek enforcement of an unreasonably narrowed definition of “patient” and was relying on nonbinding sub-regulatory guidance as support.

In December 2019, a federal district court sided with HRSA and dismissed Genesis’ case as moot. Genesis subsequently filed an appeal of the dismissal with the U.S. Fourth Circuit of Appeals. The Fourth Circuit ultimately sided with Genesis, remanding the case back to the federal district court with instructions to consider Genesis’s broader interpretation of a 340B-eligible patient rooted in the actual 340B statute. The Fourth Circuit stated that the situation presented an “ongoing controversy” since Genesis “remains subject to audit and, as the record stands, would still have to comply with HRSA’s 1996 Guidelines.”

With the upcoming federal district court’s decision on the horizon, covered entities have some important items to consider. If the federal district court rules in Genesis’s favor, covered entities may be able to rely solely upon the “patient” reference in the 340B statute and conceivably take a much broader approach to which of its patients are 340B-eligible (i.e., any patient that it considers a “patient” of the covered entity, without any other stipulations on when or where that patient was treated or how the associated medication related to that treatment). Covered entities may consider planning ahead as to how the decision may impact their 340B Program and provide opportunities for additional 340B benefit capture, including changes to third party administrator settings, and policy and procedure updates, among others. The district court may also direct HRSA to produce formal regulatory guidance for the definition of “patient,” which may allow covered entities the unique opportunity to provide input on a key aspect of 340B Program regulation.

1 The 340B statute does not clearly define a 340B-eligible patient, and simply states that “a covered entity shall not resell or otherwise transfer the drug to a person who is not a patient of the entity.” 42 U.S. Code § 256b(5)(B).

2 61 FR 55157-58

Quarles & Brady attorneys will be closely monitoring this rapidly evolving case. If you have any questions or are interested in strategizing for these potentially seismic changes, please contact your Quarles & Brady attorney or:

UPDATE: U.S. Supreme Court Sides with 340B Hospitals in Significant $1.6 Billion Part B Drug Payment Ruling

On June 15, 2022, after many years of ongoing litigation1, the U.S. Supreme Court unanimously overturned a substantial Medicare Part B payment reduction to many 340B Program participating hospitals related to certain outpatient prescription drugs provided to Medicare patients for fiscal years 2018 and 2019, totaling an estimated $1.6 billion across all affected entities. While the Supreme Court ultimately remanded the decision to the U.S. Court of Appeals to craft the appropriate remedies, this decision will likely result in a very positive financial outcome for the affected 340B hospitals. Given the ongoing 340B Program turmoil related to contract pharmacy arrangements, this is some excellent news for 340B Program hospitals affected by the Part B payment reductions. Continue Reading

Supreme Court Decision Maintains Status Quo for Disproportionate Share Percentage Calculation: What Does It Mean for the 340B Program?

Earlier today, the Supreme Court released a decision relating to how the Department of Health and Human Services (HHS) requires hospitals to calculate its disproportionate share percentage. While this percentage is primarily used to determine enhanced reimbursement rates depending on how many low-income patients the hospital treats, it is also used as a minimum 340B eligibility threshold for certain hospital providers.

In short, the Court determined that HHS’s current methodology (in effect since 2004) for calculating the disproportionate share percentage is correct and the percentage should continue to be calculated in the same manner as it has been over the last eighteen (18) or so years.

We will spare the reader from an in-depth breakdown of the Byzantine Medicare regulatory structure (even the Court acknowledged that the laws and rules at issue in this case are “mind numbingly complex”). The crux of the case revolves around the total number of Medicare “patient” days that should be included in the statutory formula used to calculate the disproportionate share percentage. Specifically, the case largely hinged on whether days where a Medicare-eligible patient was (1) treated at the hospital but (2) did NOT actually utilize his/her Medicare coverage should count as patient days included in the formula (for example, if a Medicare beneficiary has supplemental commercial insurance that has not yet been exhausted, so Medicare was not billed). The Court ultimately determined that those days should still be included in the formula, which aligns with current HHS requirements.

What Does This Mean for the 340B Program?

340B participating disproportionate share hospitals (DSH), children’s hospitals (PED), and free-standing cancer hospitals must have a disproportionate share percentage of at least 11.75% per their most recently filed Medicare Cost Report to maintain 340B eligibility. Rural referral centers (RRC) and sole community hospitals (SCH) must have a percentage of at least 8%.

From a practical perspective, this will have little to no impact on current 340B participating hospitals. The disproportionate share percentage will continue to be calculated in the same manner.

On the other hand, the Court’s ultimate decision was unfavorable to non-qualifying hospitals hoping to attain a disproportionate share percentage above the 340B Program’s minimum thresholds. If the Court would have decided the case differently and the Medicare patient days discussed above were deemed to be excluded from the calculation, this would, on the whole, have led to higher disproportionate share percentages and potentially allowed additional hospitals to qualify for the 340B Program. However, the methodology will remain the same, and hospitals on the cusp of 340B eligibility (but still under those minimum thresholds) will not experience a bump in their disproportionate share percentage based on an updated calculation.

Federal Spending Bill Offers Re-Enrollment Path for Some Hospitals

UPDATED on 3/22/2022

In a move welcomed by the growing number of hospitals forced out of the 340B Program due to falling disproportionate share hospital (DSH) adjustment percentages, Congress has passed a measure offering a chance to rejoin. Tucked away in the 2022 Consolidated Appropriations Act signed into law March 15, 2022, the bill provides a temporary re-enrollment path for hospitals that lost their 340B eligibility during the COVID-19 pandemic due to falling below the minimum DSH threshold required by the 340B statute (11.75% for DSH, free-standing cancer (CAN), and children’s (PEDS) hospitals, 8% for sole community (SCH) and rural referral center (RRC) hospitals). Continue Reading

The End of a Wild Year for 340B: HHS Issues Advisory Opinion and New GAO Report Sheds Light on HRSA’s Enforcement Pullback

2020 was a tumultuous year for virtually everyone and everything, and the 340B Program was no exception. As we outlined in previous articles, many drug manufacturers have decided that the Health Resources and Services Administration’s Office of Pharmacy Affairs (“HRSA OPA”) guidance on contract pharmacy[1] arrangements is no longer binding. Accordingly, many drug manufacturers have curtailed selling 340B-priced drugs based on contract pharmacy encounters, causing a significant disruption in operations and loss in revenue for all types of 340B covered entities. Finally, in keeping with the “roller coaster” nature of the year, the Department of Health and Human Services (“HHS”), the agency that generally oversees HRSA OPA, issued an Advisory Opinion on December 30, 2020[2] stating the law requires manufacturers offer 340B pricing on appropriate drugs dispensed by contract pharmacies.

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Notice to Covered Entities: Manufacturer Seeking 340B Claims Data

While we addressed recent wins for 340B covered entities concerning manufacturer transparency in a previous article, Merck Sharpe & Dohme Corp. (“Merck” or “Manufacturer”) now appears to seek its own access to 340B covered entity data in a different fashion.

Specifically, over the past few weeks, Merck has sent letters to numerous 340B covered entities substantially in the form below seeking access to all contract pharmacy claims data for its products. The Manufacturer letter requests that the covered entity “share 340B Program contract pharmacy claims data for [its] products” so the Manufacturer may “use this data to match against rebate claims it receives to ensure it isn’t paying duplicate Medicaid discounts and duplicate discounts on Medicare Part D and commercial utilization through [its] contracts with commercial payers[.]” This would involve the 340B covered entity uploading the requested data every two weeks via a dedicated portal. Continue Reading