Hospitals Law Pharmaceuticals

340B Court Cases

The Public Health Service Act (PHSA) in 1992, created a program to allow hospitals providing care for underserved communities to be able to access discounted drugs. The program–known as the 340B Drug Pricing Program, has been described as follows:

…[The] law requires pharmaceutical manufacturers participating in the Medicaid program to enter into a second agreement with the Secretary of HHS [Health and Human Services] — called a pharmaceutical pricing agreement (PPA) — under which the manufacturer agrees to provide statutorily specified discounts on “covered outpatient drugs” purchased by government-supported facilities, known as covered entities, that are expected to serve the nation’s most vulnerable patient populations.

Which types of hospitals are eligible to participate in 340B? There are 6 general types of inpatient covered entities:

  • Disproportionate share hospitals (DSHs),
  • Children’s hospitals
  • Cancer hospitals exempt from the Medicare prospective payment system,
  • Sole community hospitals (SCH)
  • Rural referral centers
  • Critical Access Hospitals (CAH)

There are also outpatient facilities that quality such as federally qualified health centers (FQHCs), Ryan White HIV/AIDS program grantees, Urban Indian clinics and a number of others.

A few key issues with the 340B program. First, these these drugs discounts don’t just apply at the patient level when covered entities treat poor individuals, but these covered entities can also get discounted drugs when treating not only uninsured individuals but also individuals covered by Medicare and commercial insurance. For these Medicare and commercially insured individuals, covered entities get discounted drugs but are reimbursed by Medicare and commercial insurance at much higher rates.

A paper by Cole et al., (2022) however, notes that reimbursement rates for 340B covered entities changed in 2018.

Until 2018, 340B-certified entities were reimbursed by an amount calculated as the average sales price (ASP) of the drug plus 6%. At this level of reimbursement, covered entities received substantially more than they originally paid for the drugs, and they were permitted to retain the overpayment to subsidize other clinical activities…

However, in 2018, the US Department of Health and Human Services (DHHS) determined that Part B drug reimbursements to 340B entities were so much greater than their payments for the drugs (which are often expensive oncology drugs) that this might motivate their overuse…To align reimbursements more closely with 340B drug payments, DHHS subsequently reduced the level of reimbursement from [Average Sales Price] ASP plus 6% to ASP minus 22.5%, resulting in a loss of $1.6 billion per year for 340B entities

The Cole paper reviews some on-going litigation related to this change. I summarize this below.

  • AHA v Becerra. Medicare Modernization Act of 2003, Public Law 108-173, stipulates 2 options for calculating reimbursements to 340B entities: (i) survey hospitals to estimate their average acquisition costs, or (ii) reimburse based on ASP+6%, which may then be adjusted by DHHS. The surveys generally have never been conducted so ASP+6% is standard. The AHA argued ASP minus 22.5% is not legal because no surveys were done of hospitals and thus ASP plus 6% must be used; DHHS said that the statutory language allowed for a modification of the method used to calculate these discounts.
  • Chevron USA, Inc v Natural Resources Defense Council. While this case is not specific to health care, it is pivotal for the 340B case. The court ruled in this case that federal agencies interpretation of the law should be deferred to if (i) all tools of statutory interpretation of an ambiguous statute had been exhausted and (ii) if the federal agency’s interpretation of the law was “reasonable.” With respect to 340B, does the ASP minus 22.5% constitute a “reasonable” interpretation of an “ambiguous” statute?
  • Becerra v Empire Health Foundation. This case examines how Medicare calculates disproportionate share hospital (DSH) payments to hospitals. Cass Sunstein has noted that if the authority of agencies to reasonably interpret the law were severely limited, this would increase the role of judicial policy preferences to the detriment of agency perspectives.
  • Novartis Pharmaceutics v Espinoza. Many 340B-covered have expanded the discounts they rae entitled to by using contract pharmacies. If a hospital does not have a pharmacy, contract pharmacies can fill this void. However, over time the number of contract pharmacies has increased dramatically and in 2020 some pharmaceutical manufacturers decided to limit the number of contract pharmacies that 340B covered entities could use. In this case, the judged ruled that “DHHS lacked the authority to require the pharmaceutical companies to resume offering discounts to 340B entities.”
  • Sanofi-Aventis v US Department of Health and Human Services. While the Novartis v. Espinoza case said that pharmaceutical manufacturers could limit the number of contract pharmacies, this case determined that pharmaceutical companies could not unilaterally limit the number of contract pharmacies.

For more information, please do read the Cole et al. (2022) JAMA Viewpoint.

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