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The Long and Winding Road – The Saga of the Unlawful 340B Drug Underpayments [PODCAST]

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In this episode, we’re pleased to welcome Gregory Fliszar, Vice Chair of Cozen O’Connor’s healthcare & life sciences practice, to talk about unlawful 340B drug underpayments. 

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Highlights of this episode include:

  • What is the 340B Drug Program
  • Types of hospitals that qualify
  • How hospitals are reimbursed for 340B drugs
  • Medicare Advantage plans affect
  • What cuts CMS made to the 340B drug payments
  • Rate reduction challenges

Kelly Wisness: Hi, this is Kelly Wisness. Welcome back to the award-winning Hospital Finance Podcast. We’re pleased to welcome Gregory Fliszar, JD, PhD, Vice Chair of Cozen O’Connor’s healthcare and life sciences practice, with a focus on health law, handling a variety of health law litigation and regulatory and compliance matters for different types of healthcare providers, including hospitals, health systems, hospices, and behavioral health providers. He has significant experience in handling payer-provider reimbursement disputes for healthcare providers. He also has substantial experience with HIPAA and privacy issues and negotiating managed care contracts on behalf of providers. Greg has written and spoken on a number of health law issues, including payer-provider disputes, HIPAA and privacy or confidentiality issues, and the opioid crisis. He is the current vice chair of the Health Law and Policy Coordinating committee of the ABA’s Health Law section and previously served as the national co-chair for the ABA’s joint opioid task force. Greg was also a clinical psychologist and medical school faculty member prior to entering law school. In this episode, we’re going to talk about the unlawful 340B drug underpayments. Thank you for joining us today, Greg.

Gregory Fliszar: Oh, thank you. I appreciate the opportunity.

Kelly: Well, let’s jump in, shall we? Can you tell me about the 340B drug program, and what types of hospitals qualify for the program?

Greg: Sure. I mean, the 340B program is pretty complex, so I’ll try and do this at a more 50,000-foot level rather than go deeply into the weeds. So basically, in 1992, Congress enacted section 340B. That’s where the 340B drug moniker came from. Section 340 via the Public Health Services Act. And section 340B requires pharmaceutical companies– excuse me, pharmaceutical manufacturers, to enter into an agreement with HHS, the Department of Health and Human Services, in exchange for having their drugs covered under the Medicaid and Medicare programs. And for Medicare, that would be Medicare part B. And these data agreements are called the pharmaceutical pricing agreement or PPA. So, under the PPA, as part of that contract, the pharmaceutical manufacturer has to agree to provide frontend discounts on covered outpatient drugs purchased by specific providers which are called covered entities. And that’s the hospitals that you asked me about, hospitals that participate in 340B program. It’s similar to the DISH program for those of you who do a lot of work in that area, disproportionate share hospitals.

And essentially, the whole program is set up for hospitals that serve a significant number of low income and uninsured patients to help them. And that’s why they wanted to have discounts on the drug so they could have some extra money to help out these folks provide other services. That was really the genesis of the program. And so the hospitals that are involved are what they call– I don’t call them covered entities because that, to me, is HIPAA land. But for the 340B hospitals, the typical hospitals are your DISH hospitals, critical access hospitals, rural referral centers, and children’s hospitals. There are some other ones as well, but that’s really the bulk of the 340B hospitals.

Kelly: How are hospitals reimbursed for 340B drugs under original fee-for-service Medicare?

Greg: That’s all defined by statute, actually, under the Medicare statute. And there’s really two options of how HHS, Health and Human Services, can set these prices. One is if HHS has conducted a survey of hospitals’ acquisition costs for each outpatient drug, not just a few, HHS can set the reimbursement rates based on the hospital’s quote average acquisition costs for each drug and may vary rates by hospital group. And there’s a second option. The second option is absenting the survey, HHS must set the reimbursement rates based on the average price or what’s called the average sales price charged by the manufacturers for the drug as calculated and adjusted by the secretary. So, for the beginning of the program, HHS has pretty much relied on option two, which is not doing a survey. The surveys apparently are– as I said, it has to cover each drug. So, the surveys, according to CMS, are just really unduly burdensome for them to do. It’s just not feasible. So, they really just relied on option two and set the formula. Because there’s a statutory formula under option two, which is the lesser of, A, the actual charge on the claim for the program benefits, or, two, 106% of the average sales price or what they call the ASP. And really, that’s what they’ve done. It’s been ASP plus 6%. That’s what the fee-for-service folks are paid. And again, the 340B hospital will get drugs from the pharmaceutical manufacturers at a real good discount. If they’re using these drugs for Medicare patients, they can then turn around and bill Medicare, and Medicare will pay the average sale price plus 6%. And up until 2018, where the controversies and dispute started, that’s how from 1992 all the way through, it was always ASP plus 6%.

Kelly: Very interesting. So how do Medicare Advantage plans typically reimburse hospitals for 340B drugs?

Greg: Right. And as we all know, Medicare Advantage is becoming an increasingly large player. More and more Medicare beneficiaries are deciding to join Medicare Advantage plans instead of a traditional fee-for-service Medicare. And a lot of the contracts that I’ve seen most, almost all the contracts that I’ve seen, really base it on CMS. For example, it may be a large commercial contract, and there’s an addendum to that contract, which is for the managed care component of the plan. And for managed care, they usually list inpatient and outpatient in most contracts. And for the outpatient, what they typically do is, whether it’s drugs, whether it’s diagnostics, whatever, it’s usually a certain percentage of what CMS pays. Most of the contracts for the drugs I’ve seen are 100% of CMS, or maybe if they can get 101% or 102%. But for the most part, what I’ve seen is 100% of what CMS pays. And again, CMS pays ASP plus 6%. So essentially, they’re reimbursed at the same rate.

Kelly: So, I understand that a few years ago, CMS made some drastic cuts to the 340B drug payments. When did that happen, and can you describe the cuts? And how much did they cost the industry?

Greg: Yeah, good question. This is really what started people to really start paying attention to 340B drugs. Even folks like myself, who do a lot of provider reimbursement litigation, didn’t really live much the 340B world. But once these cuts were announced, it became a big issue for everyone. Most of our hospital clients are 340B hospitals, and this issue hit them pretty hard, as I’ll get into in a second. Essentially, in the rulemaking for the outpatient perspective system for CMS, in 2017, in their final rule, out of nowhere, they dropped the rate from ASP plus 6% to ASP minus 22.5%. That’s basically a 30% discount or reduction. Their new rationale for it was based on a Medpac study. Medpac is the Medicare payment advisory committee. And they said, “Look, I mean, based on these discounts hospitals are getting from the pharmaceutical manufacturers, it’s really costing the hospitals only ASP minus 22.5% due to the discount.” So, in CMS’s view or HHS’s view, they thought the hospitals were getting some sort of windfall here. So, they enacted it. It went through. It started in January 1 of 2018. And the cuts did. They started that date, especially if it was fee-for-service. Original Medicare, it was ASP minus 22.5% instead of ASP plus 6%.

And again, CMS thought that the hospitals were really making money off of this. And they like that. But really, sort of undermining their position as this went through the court process, which we’ll talk about, is that when you look at the legislative history, part of the reason, actually one of the major reasons for the 340B program to begin with, was that it would give hospitals big discounts that they could use. The hospitals would make money off of this, and they could put it into other programs to help low-income patients, to help patients who are uninsured, to develop programs to help the community. That’s really what it was for. But anyway, these cuts were pretty big. They started in 2018. And it’s estimated that it cost the industry 1.6 billion a year, which is pretty hefty. So that’s really, over the five years that it was there, it’s close to 8 to 10 billion dollars. That’s a lot of money for hospitals, especially 340B hospitals, who are treating a lot of poor patients and don’t have huge margins of profit margin. And it wasn’t just fee-for- service. If you remember, the Medicare Advantage contracts are 100% of CMS. So, if you had a Medicare Advantage contract, your payments dropped as well because all of a sudden it was based on what the CMS rate was. And all of a sudden, it went from 100% of ASP plus 6% to 100% of ASP minus 22.5%. So, in a nutshell, that’s the reduction. It started with some rulemaking in 2017, went into effect on January 1st of 2018, and kept rolling up until recently, which we’ll discuss as we go along.

Kelly: Wow, that is fascinating. That is substantial. Did the hospital industry challenge those rate reductions? And if so, what happened with those challenges?

Greg: Yeah. Absolutely. They certainly did. And you can imagine why. As I said, you’re talking losses of 1 to 2 billion dollars a year. That’s huge. So, the American Hospital Association, two other hospital industry groups and several hospitals, sued HHS in the United States District Court for the District of Columbia to challenge the 2018 reimbursement rate change. They did this in 2018. They also did it in 2019. Those are the two cases that they brought. And one of the sources of the challenges was that HHS did not conduct a survey. If you remember, there’s two options. One is sort of the automatic ASP plus 6%. The other option for setting rates, and this is driven by statute, is that CMS had to conduct that survey where they had a look at the price of every single drug. CMS didn’t do that. So that was one of the sources of the challenges, that they didn’t conduct the survey of the hospital acquisition costs and thus couldn’t impose different reimbursement rates. And the thing that was interesting is CMS only did it for 340B hospitals. Remember, there’s a lot of other hospitals out there that aren’t 340B hospitals. And they didn’t change their rates for drugs. They only changed it for the 340B hospitals. So, a little bit of an equal protection argument there as well. But essentially, what the hospital system argued was, look, the statute says, you can only change it with a survey. They didn’t do that, and you can’t discriminate against one group and not the other. So, they won in the District Court. The hospitals won in the District Court. Everybody was very excited.

And even, I think, CMS thought they were going to lose. It looked like there was some rulemaking. In some of their rulemaking or in the preamble to some of their rulemaking, they talked about the court case before it was even decided, and said, “If it goes the other way, we welcome suggestions for how we should set the payments,” and all those types of things. So, I think even CMS had a view that maybe they had overreached a little bit. I’m not speaking for CMS. That’s just my own view. But they won at the District Court level. CMS appealed. It went to the US Court of Appeals for the DC Circuit. And this really shocked the industry. The DC Circuit reversed, and they said that basically HHS had the discretion to change these drug prices. And again, that, I think, caught the industry by surprise. I certainly didn’t expect it. The folks I talked to didn’t expect it. But all of a sudden, so at that point, the rates still kept going. And it went all the way up to the Supreme Court, which on June 15th of ’22, so just almost exactly a year ago, last June 15th, a unanimous Supreme Court, which we all know almost never happens anymore, a unanimous Supreme Court sided with the hospitals and said, “Look, CMS, you can’t do this.” They basically sided with that initial District Court opinion. And they said, “Look, it’s clear under the statute. You can only change it for one set of hospitals if you’re going to do a survey. It didn’t do a survey. You did this on your own, and you only did it for 340B hospitals. That completely violates the statute, and it is quote-unquote, “unlawful”.” That was what they called the action.

So, the Supreme Court, though, I mean, this was great news. Everybody thought this was fantastic, but that’s all it said. It said it was unlawful. It didn’t even mention anything about remedies. What happens? Because remember, this is now 2022. This has been going on for nearly 5 years of all these rate reductions. So, these hospitals were still wondering, all right, what comes next? So the case was remanded from– basically, the Supreme Court kicked it back down to the District Court in DC for them to figure out what the remedies would be, how hospitals would be made whole, if at all, by this. So, the District Court, what they did was they bifurcated the remedies. There were two motions that were filed by the hospital systems. The first one was, look, this has been ruled unlawful. Starting right now, you have to stop this payment reduction. Go back to ASP plus 6%, and it has to remain at plus 6% from that day going forward. That was the first motion. The second motion dealt with the back damages of damages before the Supreme Court. So, the District Court, in its first ruling, vacated, which means they said the rule was just– void this issue. Should have never happened. Vacated the rule from October 28th– or excuse me, September 28th, 2022 – that was a day to the District Court decision – going forward.

So, what they said was CMS could no longer apply those rate reductions from that date forward. So, from October 28th of 2022 and going forward, CMS had to go back and revert to the ASP plus 6%. That was good news. People were very happy about that, but they were all anxiously awaiting what was going to happen with the back damages, which is where all the– that’s where all the big dollars are. That’s where the hospital– this is four or five years of getting hit that 30% reduction. So, what they’re calling this is fairly recent. In January 10th of this year, of 2023, the District Court essentially punted. CMS strongly argued that– the hospital association, obviously, and the hospital industry obviously argued, “Look, this is simple. What you need to do to make us whole is pay us the difference between what we should have been paid and what we were actually paid.” But CMS said, “Look, this is too complicated. These are hundreds of millions of claims for a year.” And this is just on the fee-for-service side we’re talking about, not even the Medicare Advantage. “It’s too complicated. It’s hundreds of millions of claims per year.” Plus, and this is true, CMS under statute has what’s called budget neutrality, which means the budget has to be neutral at the end, which means if you cut something in one area, you have to increase a price at another area. Everything has to sort of equal out at the end. And they said, “This is very complicated. If you just go back and pay all those hospitals, that’s going to blow our budget neutrality. We have to figure out a way to do this.” And it seems like in a close call, the District Court agreed with CMS, so they remanded it. They kicked it back to CMS.

So, CMS now has it in their lap to come up with a remedy for the back damages. No one knows what that’s going to be. Some people doubt that it’s going to be what the hospital industry really wants, which is the difference in the payments. You paid me ASP minus 22.5%. I should have been paid ASP plus 6%. You owe me the difference for every single drug going back all those four years. A lot of people don’t think that’s going to happen. Some people are guessing that CMS may make some sort of prospective relief where they give hospitals extra money down the road for other programs. But this is all guesswork at this point. And as far as when it’s going to come out, no one knows. There was a rumor it was going to come out in April. I always thought that was pretty– I mean, it just got remanded on January 10th. That’d be pretty quick for CMS to come up with a really complex resolution like that. But in a recent– the CMS administrator was speaking to Congress about two weeks ago and was actually asked a question by one of the House of Representatives, “But what about this remedy for 340B hospitals? We’re waiting for it. The hospitals in my district are waiting for it. When can we expect it?” And the words were quote-unquote, “very soon”. Not sure what that means. Very soon for you and I could be very different from very soon on CMS’s timelines. So, we’ll have to see. But that’s where things– I know. That’s why I call this the long and winding road. It’s been up and down and up and down. But now, the last piece is the back damages, and we’re really just waiting on CMS for a decision on that.

Kelly: It certainly is a long and winding road, but it’s very fascinating one though. Okay. So, there should be some sort of remedy release by CMS shortly. I think you’ve talked about that a little. How will that affect MA plans?

Greg: Yeah, I think that’s the big question for a lot of clients. Obviously, for the traditional fee-for-service, it’s going to be– the remedy is going to be whatever CMS says it is unless there’s a challenge to the remedy and the court overturns it and we’re back on that court rollercoaster again. But say the remedy comes out, there’s no challenge to it, the fee-for-service hospitals just have to take what the remedy is. The MA hospitals are a little bit different– or the MA plans are a little bit different. And I’ve worked with a lot of health systems. I’ve written a lot of– we’ve written a lot of dispute letters to a lot of Medicare Advantage plans asking for these back damages. And it’s interesting. At first, typically responses that we get are that the plans say, well, that court case really applied to fee-for-service. It didn’t apply to us. This is a contract between two providers. And even there was some CMS guidance that came out on December 20th of 2022, after the first District Court case, where they said that the rule was vacated going forward. And CMS said that it really a lot of times goes back to contracts. MA owns that contract with a provider or a facility eligible for 340B drugs. They’re free to negotiate the terms for whatever they want, and CMS cannot interfere with the terms of that contract. So the way I read that is, again, I said, typically, the MA plans will base the payment rates on whatever CMS was. If there’s something else, where they say, “We’re going to pay you X for this drug or X for that drug,” that’s probably not going to be affected by this at all.

But I think one of the arguments is– and again, so the plans will start off with that. But then they also have said, “But like everyone else, we’re still waiting to see what the CMS remedy is to see how that affects our contracts.” So, I think everybody’s sort of in limbo trying to figure out what CMS is going to do. But again, the plans, at least right now, are taking the position that they really don’t have to pay this back. So, it’s very unclear at this point what they’re going to do.

Kelly: Yeah, it sounds like it. It sounds like a complicated situation. So, what should hospitals that have 340B underpayments with MA plans be doing to try to recover these losses?

Greg: Yeah, I think, if you haven’t already, I think hospital systems really should just file, even if it’s just a generic dispute letter to the plan. Just a quick dispute letter to the plan. You don’t even have to get into the whole contract piece. But my view is that most contracts, most Medicare Advantage contracts, most commercial contracts with hospitals, have a certain time period where you have to file a claim for an underpayment. Typically, it runs from the date you were paid. So if hospital X was paid a certain amount for a certain service which they thought was too low, under the contract, it might be you have one year from the date of that payment to contest it, otherwise, you’re out of luck. It is what it is. But here, my view, and a lot of the other folks I deal with, our view is that any sort of statute of limitations concerns should really have started to run from June 15th of 2022. That was the date of the Supreme Court decision. And that’s coming up close. That’s a year. So, if I were a plan– excuse me, if I were a hospital, I would try quickly to try and get some dispute letters out the door just to sort of preserve your claim. We don’t know what’s going to happen, but you don’t want to have to be dealing with statutes of limitation issues after the fact if you can just deal with it right now.

So again, the clock is ticking as we’re sitting here right now on May 12th. And the decision by the Supreme Court was June 15th of last year. So, you’ve really only got a couple of weeks left. If I were a plan, I would really try and get those dispute letters in. They don’t have to be perfect. You just need to get it in and explain that you feel that the rate cuts were based on an unlawful CMS rate adjustment. It shouldn’t have happened, and we should be reimbursed for it. That’s a very simplistic view. The letters are usually a little bit more complicated than that. But really, I think you need to– if you’re a hospital, you really need to get your dispute letter out as soon as possible just to stake and preserve your claim.

Kelly: Yeah. No, that makes a lot of sense, Greg. So, what challenges have you faced in trying to recover 340B underpayments on behalf of your hospital clients?

Greg: Right. Well, like I said, we send out a lot of dispute letters, and a lot of them come back the same. I haven’t seen one yet that says, “Oh, we’ll go ahead and pay you these damages.” Every now and then– again, on the fee-for-service side, even though the court vacated it from September 28th forward for 2022, a lot of the MACs, the Medicare administrative contractors, they’re the ones who control the payment on the fee-for-service side, they’ve given hospitals the opportunity to resubmit their claims going all the way back to January 1st of 2022. So, they can get all of 2022 back, and they will pay them the difference. I’ve heard that there’s been maybe one or two plans that have sort of offered the same deal, just for 2022, but I have yet to hear of any plan saying, “We’ll go ahead and pay you the difference for the last five years.” I haven’t heard that yet. I do think, for the reasons I said before, the typical argument they say, the plans argue, which I can understand their argument, is I don’t necessarily think it wins at the end of the day, but that’s just my opinion. But what the plans are saying is, look, the contract says with the contract says. It says it’s 100% of CMS, and sometimes it even says 100% of the prevailing CMS rate, which means the rate at the time. So basically, the plan is saying, “Look, we paid what was due at the time, so there’s no problem. The fact that CMS later changed it, that has nothing to do with us. We paid what was due at the time the bill was filed.” That’s their position. They’re sticking pretty hard to it.

So that’s been one of the hard pieces to deal with. Another one, and again, I think for that, my answer to that as well, this is a little bit different. Yes, you did pay what was due under the contract, but the rate that was based on has been ruled to be unlawful. I think that’s a very different situation than just– I think that the argument of the plans have maybe oversimplified a bit due to the fact that the rate that they paid was based on something that’s been ruled to have been unlawful. My analogy to that is– I’m from Philadelphia. Long time ago, there was a guy by the name of Joey Coyle, who was driving home from work one day in South Philadelphia, and [inaudible] truck in front of him, apparently didn’t lock their back doors, hit a pothole, and just bags of money came flying out. He grabbed all the money and held onto it. He got arrested. And his defense was essentially something similar to the plans, saying, “Well, hey, I found it. It’s mine. There was no prohibition against it when I picked it up off the street.” But he knew, and that’s what the court said, “You knew it didn’t belong to you.” And I think that’s one of the things here. I think the plans have to deal with the fact that, yeah, they paid what the rate was, but that rate should have never happened. That rate is an unlawful rate that it was based on. So that’s one thing. I think another roadblock or challenge that we’re facing is many plans have– especially in their fee schedules where it says 100% of CMS, they will explain how midyear changes work. Because oftentimes, for all kinds of rates, for all kinds of services, CMS may tweak them or adjust the payment rates throughout the year.

And a lot of contracts may say, for example, that we’ll make midyear adjustments, and then within a certain amount of time– if CMS makes a midyear adjustment or an adjustment throughout the year, we have a certain amount of time to put that and load it into our system, and then we’ll start paying what CMS does. Some plans have things in there that say, “However, we won’t pay anything retroactively.” So that’s another roadblock that you have to look at. And you have to really look at the whole contract and see how everything fits in and read it in context. But I think that’s another bump in the road for hospitals that have those types of contracts.

Kelly: Yeah, no, I love that story. And it’s a great analogy. Thank you. And thanks so much for joining us today, Greg, and for sharing all of this very valuable information.

Greg: Oh, sure. Anytime, Kelly. I enjoyed the conversation.

Kelly: Yes. Me too. And if a listener wants to learn more or contact you to discuss this topic further, how best can they do that?

Greg: Sure. The best way is email, like all of us, I’m sure. But my email is G as in Greg, F as in Frank, L as in Lion. I as in ice, S as in Sam, Z as in zebra, A is an apple, and R as in red at cozen dot com. That’s C-O-Z-E-N dot com. I just spelled it because I have a very goofy sort of last name.

Kelly: No, thank you. Appreciate that. And thank you all for joining us for this episode of The Hospital Finance Podcast. Until next time…

[music] This concludes today’s episode of the Hospital Finance Podcast. For show notes and additional resources to help you protect and enhance revenue at your hospital, visit The Hospital Finance Podcast is a production of BESLER | SMART ABOUT REVENUE, TENACIOUS ABOUT RESULTS.


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