News & Insights


July 10, 2023

Health Headlines – July 10, 2023

CMS Announces Proposed $9 Billion Remedy for Hospitals Underpaid by Unlawful Rate Cut for 340B Drugs – On July 7, 2023, CMS published its highly-anticipated proposed rule identifying its remedy to reimburse hospitals unpaid by its unlawful 340B drug payment policy (the Proposed Rule).  While the Supreme Court found CMS’s 340B drug payment policy to be unlawful in 2022, the case was ultimately remanded back to the agency to craft the remedy. In the Proposed Rule, CMS proposes to make a lump sum payment to each affected hospital and purports to pay the difference between what the hospitals should have been paid and what they were paid based on claims data submitted between 2018 and 2022, excluding interest. While the lump sum payments are welcome news for 340B hospitals, CMS also proposed to make a corresponding offset to future Outpatient Prospective Payment System (OPPS) payments to maintain budget neutrality by adjusting the OPPS conversion factor by minus 0.5% starting in CY 2025 and lasting for an estimated 16 years. 


Prior to 2018, CMS paid all acute care providers for separately payable outpatient drugs at the rate of average sales price (ASP) plus 6% as required by statute. However, effective in 2018, CMS implemented its 340B rate cut policy to cut the rates for separately payable drugs purchased under the 340B program to ASP minus 22.5%.

A group of plaintiffs, consisting of 340B hospitals and hospital associations, challenged the Secretary’s 340B rate cut in federal court. Plaintiffs were initially successful in district court, which concluded that the Secretary violated the plain language of the statute. The district court’s decision was reversed by the D.C. Circuit. The Supreme Court took review of the case to determine whether the 340B rate cuts were lawful under the statute. On June 15, 2022, the Supreme Court issued a unanimous ruling in American Hospital Assn. v. Becerra declaring that CMS’s 2018 and 2019 reimbursement outpatient drug rate cut to 340B hospitals was “contrary to the statute and unlawful.” The Supreme Court, therefore, reversed the judgment of the D.C. Circuit and remanded the case for further proceedings. The D.C. Circuit subsequently remanded the case to the District Court for the District of Columbia to determine the remedies. The District Court remanded the matter back to the agency without vacatur because of the “potentially disruptive consequences” that would result from vacatur including alleged concerns of budget neutrality and “enormous number of settled transactions” that occurred from 2018-2022—amounting to $10 billion by some estimates—that the agency would need to remediate. 

CMS’s Proposed Remedy

Before announcing its proposed lump sum payment to affected hospitals, CMS discussed the different remedy options that it did not adopt for its proposal. As an initial matter, CMS ruled out the possibility of making the remedy payments to affected hospitals without making a corresponding budget neutrality adjustment to the OPPS rates. CMS concluded that “a budget neutrality adjustment is statutorily required and, even if not statutorily required, warranted as a matter of sound public policy.” CMS then considered reprocessing every single 340B drug claim submitted by hospitals during the 5-year period at issue, which CMS deemed was not administratively feasible. CMS also considered making a one-time agreement payment to affected 340B hospitals while at the same time making a one-time hospital-specific recoupment to account for budget neutrality. CMS likewise rejected this approach because of the immediate and large retroactive recoupments that some hospitals would incur. CMS also considered its authority to pay interest on the remedy payments but stated that it does not believe it has the authority to do so.

Under CMS’s current proposal, for each affected 340B covered entity hospital, CMS will calculate the amount the hospital would have been paid under the OPPS from CY 2018 through September 27th of CY 2022 for drugs the hospital acquired through the 340B Program had that 340B policy not been in effect. CMS would then subtract from this amount the amount each affected 340B covered entity hospital was paid under the OPPS for 340B-acquired drugs during the period of CY 2018 to September 27th of CY 2022. CMS would obtain this information from claims data.  According to CMS, this proposed additional lump sum payment amount would result in the affected 340B covered entity hospital receiving the default ASP plus 6 percent rate. CMS plans to issue instructions to its contractors to remit payment under these parameters within 60 days of receiving those instructions. CMS anticipates that payments would likely remit by the end of CY 2023 or beginning of CY 2024, if the Proposed Rule is finalized. 

CMS’s Proposed Rule is available here and will be published in the Federal Register on July 11, 2023.

Reporter, Michael L. LaBattaglia, Washington, D.C., +1 202 626 5579,

Federal District Court Grants Injunction Barring CMS from Implementing New Policy on Medicaid Funding Designed to Prevent Redistribution of Medicaid Payments Among Private Providers– On June 30, 2023, the United States District Court for the Eastern District of Texas (the Court) granted the State of Texas’ preliminary injunction motion, enjoining CMS from implementing and enforcing its Informational Bulletin, dated February 17, 2023, (the Bulletin) on the use of healthcare-related taxes to fund the non-federal portion of Medicaid payments while litigation between Texas and CMS related to the legality of the Bulletin (the Lawsuit) remains ongoing.

State Medicaid programs are funded by both the federal government and each individual state. States may fund their share of Medicaid payments by assessing taxes on healthcare-related items, services, or providers but only if the tax is broad-based and contains no hold harmless provision. 42 U.S.C. § 1396b(w)(1)(A)(iii). A hold harmless provision exists if “[t]he [s]tate or other unit of government imposing the tax provides (directly or indirectly) for any payment, offset, or waiver that guarantees to hold taxpayers harmless for any portion of the costs of the tax.” § 1396b(w)(4)(C)(i).

On February 17, 2023, CMS issued the Bulletin, clarifying its position that healthcare-related tax program arrangements that contain hold harmless arrangements involving the taxpaying providers redistributing Medicaid payments to ensure that all taxpaying providers receive at least a portion of their tax costs back are impermissible in violation of the Social Security Act and implementing hold harmless regulations. The Bulletin also states that CMS would reduce a state’s medical assistance expenditures by the amount of healthcare-related tax collections that include these types of arrangements. A copy of the Bulletin can be found here.

Texas, which uses healthcare-related taxes to fund the non-federal portion of Medicaid payments, filed the Lawsuit on April 5, 2023, in the Eastern District of Texas against CMS and HHS, seeking to invalidate the Bulletin on grounds that the Bulletin exceeds CMS’s statutory and regulatory authority, did not go through notice and comment rulemaking required under the Administrative Procedure Act, and is arbitrary and capricious.

After finding that Texas has standing in the Lawsuit, the Court granted Texas’s motion for preliminary injunction, concluding that Texas is likely to succeed in its claim that the Bulletin exceeds CMS’s statutory and regulatory authority. The Court reasoned that the Bulletin improperly expands the definition of the “hold-harmless provision” beyond what is contemplated in the statute at 42 U.S.C. § 1396b(w)(4)(C)(i) and implementing regulations to include guarantees by private parties in private agreements. The Court reasoned that while the statute includes a “tight grammatical link” between the government and the guarantee being provided, the Bulletin states that CMS will disallow funds where private providers guarantee to hold one another harmless by entering into agreements to redistribute Medicaid payments to ensure that taxpayers receive at least a portion of their tax payments back. The Court found that CMS exceeded its statutory authority by including these private arrangements in the definition of the “hold-harmless provision” in the Bulletin.

The Court also held that Texas had sufficiently demonstrated that it would face substantial threat of irreparable injury if the motion was not granted due to the large compliance costs that Texas would have incurred to comply with the Bulletin, which would not be recoverable at a later date since CMS is immune from monetary damages.

While the Lawsuit remains ongoing, the Court’s decision on the preliminary injunction is a setback on CMS’s recent efforts to expand the definition of hold harmless arrangements and to invalidate certain healthcare-related taxes. Also, the Court’s granting of Texas’ preliminary injunction is an indication of Texas’ likelihood to succeed on the merits in the Lawsuit and preserves the status quo on hold harmless arrangements while the Lawsuit is pending.

The Court’s order granting Texas’s preliminary injunction motion can be read here.

Reporter, Brittany Bratcher, Austin, +1 512 457 2071,

Joint Proposed Rule Aims to Increase Consumer Protections Under the Affordable Care Act –  HHS, the Department of Labor’s Employee Benefits Security Administration, and the Internal Revenue Service (IRS) (collectively, the Departments) issued a proposed rule on July 7, 2023, aimed at shoring up consumer protections in the Affordable Care Act (ACA) by removing loopholes used by short-term limited-duration insurance companies to provide consumers with cheaper, but lower quality insurance (the Proposed Rule).

Short-term limited-duration insurance (STLDI) is meant to provide short-term gap coverage for individuals who are transitioning to another insurance. Currently, the Public Health Service Act’s definition of individual health insurance coverage does not include STLDIs. Therefore, STLDIs are not subject to the same ACA consumer protections as other coverage. These protections include the prohibition on excluding individuals with pre-existing conditions and not discriminating based on an individual’s health status.

To help consumers differentiate between STLDIs without these protections and comprehensive coverage, the Proposed Rule attempts to realign STLDIs with their intended purpose of providing gap coverage. The Proposed Rule proposes to limit the duration of the STDLI contract period to no more than three months with coverage lasting up to four months. The Departments also propose to prohibit stacking where the same policyholder issues multiple STDLIs to the same individual. Both proposals are meant to shorten the duration of time that consumers rely on STDLIs before transitioning to more comprehensive coverage.

Fixed indemnity excepted benefits coverage is also exempt from certain consumer protections because it is designed to be an income replacement instead of providing consumers with comprehensive coverage. The Departments are proposing changes to ensure that consumers do not mistakenly think that fixed indemnity benefits coverage is a replacement for comprehensive coverage.

The new proposal would require fixed indemnity excepted benefits coverage to provide benefits that are paid on a per-period basis instead of a per-service basis. The Departments are also proposing that a consumer notice be given before a consumer purchases group market fixed indemnity excepted benefits coverage so that the consumer is aware that the coverage is not meant to be comprehensive coverage. The Proposed Rule also seeks to clarify that employers who offer benefits under fixed indemnity insurance that are tied to a group health plan’s exclusion of benefits that is maintained by the same plan sponsor would violate the “noncoordination” requirements because the coverage is not to be offered on an independent basis. This is meant to protect employees and discourage employers from offering coverage that mimics comprehensive coverage but does not offer the same consumer protections.

The Departments are also soliciting comment on how specified disease excepted benefits coverage is being sold to consumers and how these benefits are designed to inform any future agency action. In addition, the Departments are seeking additional information about level-funded plans to determine whether more guidance is needed regarding a plan sponsor’s obligations to provide coverage through these level-funded group health plans. Finally, the IRS proposes amendments to clarify that amounts paid on a pre-tax basis when benefits are not tied to the medical expenses incurred are not exempt from a taxpayer’s gross income. The amounts to be excluded from the taxpayer’s gross income for employment-based accident health insurance payments to reimburse medical expenses must also be substantiated.

The Proposed Rule is available here and will be published in the Federal Register on July 12, 2023.

Reporter, Taylor Whitten, Sacramento, +1 916 321 4815,