News & Insights


July 23, 2018

Health Headlines – July 23, 2018

D.C. Circuit Affirms District Court’s Dismissal of Legal Challenge to Medicare Rate Cut for 340B Discounted Drugs – On July 17, 2018, the United States Court of Appeals for the D.C. Circuit affirmed the D.C. district court’s dismissal of a pre-implementation challenge to CMS’s policy to cut the Medicare reimbursement rate for separately-payable outpatient drugs by nearly 30 percent. The legal challenge was brought by the American Hospital Association, the Association of American Medical Colleges, America’s Essential Hospitals and three public and not-for-profit hospitals. The D.C. Circuit affirmed the lower court’s ruling that it lacked jurisdiction over the lawsuit because plaintiffs had failed to first present their claims in the form of a request for payment for the Secretary’s review and determination, as required by the Social Security Act, 42 U.S.C. § 405(g).

In November 2017, CMS issued the Fiscal Year 2018 Outpatient Prospective Payments System (OPPS) final rule which adopted CMS’s earlier proposal to reduce the reimbursement rate for separately-payable outpatient drugs purchased through the 340B Program to averages sales price (ASP) minus 22.5 percent. CMS based its decision, in part, on a recent MedPAC study which concluded that 340B hospitals received an average discount of 22.5 percent of ASP. Further, CMS reasoned, the low acquisition cost combined with high Medicare reimbursement rate might encourage unnecessary utilization of certain 340B drugs. CMS predicted the new policy would reduce Medicare OPPS aggregate payments for 340B purchased drugs by $1.6 billion. CMS used these anticipated savings to raise reimbursement rates for all other OPPS services by 1.35 percent.

Plaintiffs, along with several other organizations and individual providers, had submitted public comments in opposition to CMS’s earlier proposal, arguing among other things that CMS was required to set the reimbursement rate for separately-payable outpatient drugs to either the average hospital acquisition costs, as determined by a survey of hospital acquisition data, or the ASP. CMS did not, according to these comments, have the authority to adjust the ASP methodology so drastically without actual hospital survey data. Plaintiffs also noted that the 30-percent reduction in reimbursement would significantly hinder hospitals’ abilities to provide necessary services to vulnerable patients. Despite this opposition, CMS asserted it had broad discretion to adjust 340B Program payment rates and finalized the originally proposed payment scheme on November 13, 2017.

The Suit Against CMS – D.C. District Court

Immediately after CMS published its final rule, plaintiffs sued CMS in federal court, seeking a preliminary injunction to prevent the agency from implementing the 340B rate cut. The government opposed the request for a preliminary injunction and sought to dismiss the lawsuit on the grounds that the agency’s decision to adjust the Medicare reimbursement rate for separately-payable drugs under the OPPS was precluded by statute from administrative and judicial review. CMS also claimed in the alternative that the district court did not have jurisdiction to hear plaintiffs’ claims because plaintiffs had failed to first present their claims to the agency in the form of a claim for reimbursement that would allow CMS to review and make a final decision on their claims administratively, as required by § 405(g) of the Social Security Act. The district court was persuaded by the § 405(g) argument and granted the government’s motion to dismiss on December 29, 2017, bringing to an end the plaintiffs’ request for a preliminary injunction. The district court did not address the government’s arguments that its OPPS payment adjustment was precluded from administrative and judicial review. The district court also did not address the merits of the case—whether CMS had the authority to adjust the OPPS payment rate for separately-payable drugs using acquisition cost data that is not based upon hospital survey data and, therefore, is compelled by statute to price separately-payable drugs by reference to their ASPs.

Impact of the  D.C. Circuit Opinion

Plaintiffs appealed the district court’s dismissal. The D.C. Circuit heard oral argument on May 4, 2018, and affirmed the lower court’s decision on July 17, 2018. Like the district court, the D.C. Circuit addressed only the government’s claim that the lower court lacked jurisdiction because plaintiffs had failed to present their claims as required by § 405(g) of the Social Security Act.

Section 405(g) allows any person to file a civil action “after any final decision of” the Secretary “made after a hearing to which he was a party,” to “obtain a review of such decision” in federal district court. The D.C. Circuit held that that § 405(g), therefore, imposes two preconditions for obtaining judicial review of Medicare claims. First, the plaintiff must have “presented” the claim to the Secretary. Second, the plaintiff must fully exhaust all available administrative remedies. While the second requirement—“exhaustion”—can be waived in certain cases, the “presentment” requirement cannot.

The D.C. Circuit held that for a district court to have subject matter jurisdiction over a Medicare claim, § 405(g) requires that the Secretary of HHS must have been party to a hearing and must also have issued a final decision following that hearing. Even though plaintiffs had raised all of their arguments in their comments in response to the Secretary’s 340B discount-drug rate-cut proposal, these comments did not meet the “presentment” requirement because a regulation cannot be equated to a “final decision” and notice-and-comment rulemaking cannot be described as a “hearing” to which all commenters have assumed party status. The court ultimately ruled that “submitting comments in response to reimbursement rates―wholly detached from any specific payment dispute―is [not] the kind of ‘concrete claim for reimbursement’ required for presentment.”  American Hospital Association, et. al. v. Azar M. Azar, et. al., 2018 U.S. App. LEXIS 19602, *11 (D.D.C. July 17, 2018).

Alternatively, plaintiffs argued that they cured the presentment problems through payment demands made to HHS during the pendency of the appeal. The D.C. Circuit ruled that, while plaintiffs might have been able to remedy their “presentment” problem by pursuing their claims in the context of a payment dispute and amending their complaint in district court, these efforts were made only after the district court dismissed plaintiffs’ lawsuit and during the  pendency of the appeal, and therefore were too late to establish subject-matter jurisdiction in the district court.

The D.C. Circuit did not address the question of whether plaintiffs met the second condition of exhaustion and did not rule on the merits of plaintiffs’ claims against the CMS outpatient-drug rate-cut. Nor did it address the government’s alternative theory that the Secretary’s adjustment to the reimbursement rates for separately-payable drugs under the OPPS is precluded by statute from administrative and judicial review.

Although its ruling is procedural, the D.C. Circuit’s decision will have profound impact on all providers who are affected by the 340B rate cut. Plaintiffs in this lawsuit, or any other hospital that is affected by the rate cut, could presumably move forward with another legal challenge to the Secretary’s policy after presenting their claims to the Secretary in the context of a “payment dispute”—an administrative appeal of a claim for reimbursement paid at ASP minus 22.5 percent for a separately-payable drug purchased under the 340B program. Indeed, the three associations have indicated they intend to promptly refile their claims in district court. Many providers had already been filing such appeals since January 1st on all affected claims in order to preserve their rights to retroactive reimbursement should the Secretary’s policy be successfully challenged in a future lawsuit. Pursuing these appeals is a costly matter. Compounding the problem, it has been reported that CMS has instructed its administrative contractors not to process such appeals, but to dismiss them on the theory that administrative contractors do not have authority to review such claims because the 340B payment adjustment is precluded from administrative and judicial review. Hospitals are then faced with a decision as to whether to appeal the dismissal in order to continue to preserve their putative right to reimbursement. The D.C. Circuit decision did not grapple with any of these complications, but only extended the timeline to their resolution by sending plaintiffs’ lawsuit back to the starting line.

The Opinion can be found here.

Reporters, Mark Polston, Washington, D.C., +1 202 626 5540,, and Kirstin Rodrigues, Atlanta, +1 404 572 4671,

OIG Report Identifies Weaknesses in Medicaid Managed Care Organizations’ Efforts To Identify Fraud and Abuse – On July 11, 2018, OIG issued a report entitled “Weaknesses Exist in Medicaid Managed Care Organizations’ Efforts To Identify and Address Fraud and Abuse.”  In its report, OIG states that Medicaid managed care organizations (MCOs) “are on the front line of ensuring the integrity of Medicaid Payments” and that MCOs need to improve both reporting fraud and abuse to the State and recovering overpayments. The report finds that CMS and States have opportunities to better work with MCOs to curb fraud and abuse and to ensure taxpayer dollars are being spent appropriately.

Traditionally, CMS, State agencies and MCOs are each responsible for program integrity in Medicaid. According to OIG’s report, the nature of States’ efforts to ensure program integrity changes with managed care, due to the shifting of responsibility for identifying fraud and abuse to MCOs. MCOs cover 80 percent of all Medicaid enrollees and are the primary delivery system for Medicaid as of 2015. With this increased role in care delivery, OIG has expressed concerns that fraud and abuse are prevalent with MCOs and that they “often lack[] the incentive to detect and refer potential fraud.”

The report’s stated purpose is to assess MCOs’ and States’ program integrity. As the report notes, “[f]raud, waste, and abuse in Medicaid cost States billions of dollars every year, diverting funds that could otherwise be used for legitimate health care services.”  In 2016, CMS issued a final rule codifying MCOs’ responsibilities to report fraud and abuse, which include referring cases of fraud and abuse to the State, suspending provider payments if there is a State determination that there is credible allegation of fraud and identifying and recovering overpayments. CMS’s final rule also requires MCOs to submit encounter data to the state. According to the report, CMS announced in June 2017 that it would work with States that were unable to implement the requirements of the final rule as scheduled. The report builds on OIG’s prior work, which has primarily focused on States’ efforts, by focusing on MCOs’ efforts to identify and address cases of suspected fraud or abuse.

The OIG report is based on data obtained from three areas: (1) a 2015 survey from MCOs with the largest expenditures in each of the 38 states that provide Medicaid services through managed care; (2) interviews with officials from five selected MCOs; and (3) interviews with officials from the same five states as the selected MCOs. Additionally, the report notes that its focus is solely on full-risk managed care and excludes partial-risk models such as prepaid inpatient-health plans.

The report finds that within the 38 MCOs included in the study, the numbers of identified cases of fraud and abuse in 2015 “ranged widely.”  While three of the 38 MCOs included in the report identified over 800 cases, seven others identified fewer than 30. The report also finds that the numbers of reported cases in general were very low. Specifically, although four MCOs included in the study referred more than 100 cases to the State, one-third of the included MCOs reported fewer than 10 cases of fraud and abuse. The report additionally finds that MCOs do not always identify or recover overpayments, including four MCOs that did not identify any overpayments in 2015. MCOs and States both note that offering MCOs additional incentives to recover overpayments may encourage better efforts.

Although the report identifies that a select number of States already employ strategies to improve MCOs’ efforts,  OIG notes that “CMS and States have opportunities to work together to make improvements in MCOs’ efforts to identify and address fraud and abuse.” With this in mind, OIG recommends eight specific areas for CMS to work with States. Specifically, CMS should work with States to:

  1. Improve MCO identification and referral of cases of suspected fraud or abuse;
  2. Increase MCO reporting of corrective actions taken against providers suspected of fraud or abuse to the State;
  3. Clarify the information MCOs are required to report regarding providers that are terminated or otherwise leave the MCO network;
  4. Identify and share best practices about payment retention policies and incentives to increase recoveries;
  5. Improve coordination between MCOs and other State program integrity entities;
  6. Standardize reporting of referrals across all MCOs in the State;
  7. Ensure that MCOs provide complete, accurate, and timely encounter data; and
  8. Monitor encounter data and impose penalties on States for submitting inaccurate or incomplete encounter data.

In its comments to the report, CMS agreed with all but one of these recommendations. CMS noted that standardized reporting of referrals across all MCOs in the state would hinder State flexibility. OIG responded that, although it agrees with CMS that State flexibility is important, it continues to support working with states to develop a standardized template for MCOs to “reduce provider burden and improve the quality and consistency of referrals.”

Reporter, Kiel Yager, Sacramento, +1 916 321 4811,


King & Spalding Webinar on Reference-Based Pricing – On July 26, 2018, at 1:00 p.m. ET, King & Spalding will host a webinar titled “Legal and Practical Implications of Reference-Based Pricing.”  King & Spalding partner, John Barnes, and associate, Kiel Yager, will discuss the legal implications of reference-based pricing by self-insured payors, including what is reference-based pricing, strategies for providers to identify reference-based pricing, options for providers to respond to reference-based pricing and best practices to limit the damages caused by use of reference-based pricing. The webinar is free and open to clients and non-clients. Registration is available here.

11th Annual King & Spalding Medical Device Summit – King & Spalding, in conjunction with FDANews, will host the 11th Annual Medical Device Summit on September 6, 2018, in Chicago. Registration is now open. Subjects will include regulatory, reimbursement, enforcement, compliance, commercial, litigation, cybersecurity and other important topics for medical device manufacturers in the coming year. For more information, please click here.